When is the Interest really too damn high? – Usury in New York

Did you know that there are actually limits in New York as to how much a lender can charge you in interest? In general, no person or entity may charge interest in excess of 16% per annum.  That is set forth in New York General Obligations Law Section 5-501 and is called civil usury.  If they do, the loan agreement or promissory note is considered void, see New York General Obligations Law Section 5-511 .  If anybody charges more than 25%, it is even considered criminal, New York Penal Law Section 190.40.

Now, there are many exceptions and finer points to consider.  For example, banks are held to different standards. This post is not about what banks can and cannot charge you in interest.  Then there are differences in how the law applies to corporations and limited liability companies as opposed to individual borrowers.  Let’s break it down:

Loans to Individuals

Loans to Individuals are void if they charge more than 16% interest per year and the loan amount is under $250,000.  See New York General Obligations Law Section 5-501  and New York General Obligations Law Section 5-511.

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What is the actual Interest Rate?

Sometimes you have to do some math in order to find the true interest rate.  For example, if the loan charges interest of 2% per month.  After calculation, this results in 24% per annum and thus is not allowed.  Or the loan documents may not even call it interest; for example, the loan is $100,000 and it is due in one year from the date of the loan.  On the due date, $150,000 is due.  Well, just because you don’t call it interest, it is still considered interest.  $50,000 in one year on a $100,000 loan would be 50% interest and void.

What does it mean that the loan agreement or promissory note is void?

Well, it literally means that you do not have to repay the loan, the money is for you to keep.  But, if any money or interest has already been paid to the lender, you can only get the excess back, in other words, the amounts that were over the allowed limits, see General Obligations Law Section 5-513.

Exceptions

If the loan is over $250,000, the 16% rule no longer applies, unless the loan is secured by real property consisting of a one or two-family residence.

If the loan is over $250,000, criminal usury may apply, which makes it criminal to charge more than 25% interest per annum.

If the loan is over $2,500,000, the sky is the limit.  Civil usury or criminal usury no longer apply.  When you are playing around with that much money, the law assumes that you know what you are doing and no more protections are in place.

Loans to Corporations or LLCs

Corporations or LLCs cannot raise the “Void” defense against a loan that charges more than 16% interest per year.  For corporations, see General Obligations Law Section 5-521.  For LLCs, see Limited Liability Company Law Section 1104.  But Corporations and LLCs can raise criminal usury as an affirmative defense if the loan charges more than 25%.  But what happens to those loans? Are those loans also void?   The case law used to be somewhat murky whether those loans should also be considered void.  Now there is clarity.  In a recent case, the New York Court of Appeals, which is New York’s highest court, has ruled that when corporations raise the criminal usury defense, the loan is void and unenforceable from the beginning. See Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320.

Exceptions

If a loan to a corporation is secured by collateral and over $100,000, and the interest is no greater than 8% above the prime rate of interest on the date of the loan, criminal usury does not apply,  see General Obligations Law Section 5-526.

If a borrower was instrumental in drafting the loan documents and providing for the usurious interest rate, they may not be able to use the defense.  In other words, there is no gaming the system by purposefully providing for a usurious interest rate so that the loan documents are not enforceable.

Similarly, if someone is forced to use a corporate entity to borrow the money just to circumvent the usury laws, it may also be a no-go.

There you have it.  New York Usury Laws put some limits on how much interest can be charged.  Individuals cannot be charged more than 16% on loans less than $250k and individuals, corporations and LLCs not more than 25% on loans between $250,000 and $2.5 million.  If those limits are crossed, the loans are void.   Contact us if you want to discuss your case or situation relating to New York Usury laws.

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.