The purpose of usury laws is to protect borrowers from large interest rates or predatory lending practices. Each state's usury law varies, but in certain instances---such as those involving credit card companies---one state's usury law may apply over another states depending on where the lender is incorporated. In California, usury laws are spread across many of the sections of the California Code, including the civil, financial and corporate sections.
California Usury Limits
California differentiates between two types of loans: consumer loans and non-consumer loans. Consumer loans, in general, are loans for personal or household purposes as opposed to business or commercial purposes, according to BusinessDictionary.com. California caps the interest rate on these types of loans at 10 percent. For non-consumer loans, California allows the greater of 10 percent or 5 percent above the rate charged by the Federal Reserve Bank of San Francisco (FRBSF) on advances to member banks. If the FRBSF charges seven percent interest, as it did in 1999 for example, the interest cap is twelve percent. If, however, the FRBSF charges 0.75 percent, as it did in February 2010 for example, the interest cap is 10 percent, since 10 percent is higher than 5.75 percent.
Penalties for Exceeding the Usury Limit
In California, lenders may be subject to severe civil and criminal penalties for making usurious loans. Civil penalties range from requiring the lender to forfeit all interest paid by the debtor---not just the interest amount that exceeded the usury limits. If a lender willfully violated the usury laws, she may be subject to a felony charge and could face up to five years in prison. Unfortunately for most debtors, there are several exceptions to the usury limits.
Exceptions to California's Usury Laws
Those subject to usury laws in California are more the exception than rule. For example, most financial institutions such as banks and credit unions are not subject to the usury limits. Usury laws do not apply to insurance companies or third party credit card companies, according to the law firm of Niesar & Vestal. Most of the common creditors---such as banks and credit card companies---are not subject to usury laws.
Usury Examples
The easiest example of when usury law would apply is a loan made between two private individuals. If Bob lends his neighbor a sum of money so that his neighbor can fix a hole in his roof (a consumer loan), Bob cannot violate the usury limits regarding consumer loans (charge interest higher than 10 percent). If, however, a California resident takes out a credit card, the usury limit is dependent on what state the credit card company is incorporated in. If the credit card company is incorporated in a state with no usury limit, the California holder of that card is subject to that state's usury laws and, since there is no limit, the credit card company could charge a rate above California's legal limits.
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