How California Usury Laws Affect Private Loans and Business Financing?

California Usury Laws: What Borrowers and Lenders Need to Know

California’s usury laws limit how much interest can be charged on loans or forbearance of money. Violating these limits can void a loan, trigger repayment penalties, or even result in criminal liability. Knowing the rules helps lenders stay compliant and allows borrowers to identify illegal or predatory lending practices.

Interest Rate CapsUnder Article XV, Section 1 of the California Constitution, non-exempt lenders generally face these limits:

• Consumer loans: Maximum of 10% per year.

• Non-consumer loans: The higher of 10% or 5% above the federal discount rate (typically 10–12%).

Additionally, California Civil Code § 1916-2 prohibits charging any amount greater than twelve dollars upon one hundred dollars for one year (12% interest). It also forbids compound interest unless clearly stated in writing and signed by the party to be charged. Any contract requiring interest in excess of this limit, or compounding interest without written consent, is null and void as to those provisions, and the lender cannot demand early repayment until the loan term has expired.

Who Is Covered?

Usury limits apply to most private or unlicensed lenders, such as individuals and businesses that do not regularly lend money. For example, if you loan funds privately—such as to a friend, colleague, or through a promissory note—you are likely subject to California’s usury restrictions.

Who Is Exempt?Many regulated lenders are exempt from usury limits, including:

• Banks, credit unions, and savings & loan associations

• Licensed finance lenders and pawnbrokers

• Licensed real estate brokers making loans secured by property

• Business loans of $300,000 or more made to corporations or LLCs

Bona fide credit sales and legitimate service fees (such as underwriting or administrative costs) are also exempt. However, if such fees merely disguise extra interest, courts can recharacterize them as usurious. When a transaction appears legal but is intended to conceal excessive interest, California courts look to the substance over the form. As stated by the Supreme Court, courts “have been alert to pierce the veil of any plan designed to evade the usury law and in doing so to disregard the form and consider the substance.” (W. Pico Furniture Co. v. Pac. Fin. Loans, 2 Cal.3d 594, 603 (1970), quoting Milana v. Credit Discount Co., 27 Cal.2d 335 (1945)).

Penalties for Violations

Charging unlawful interest can require forfeiting all interest and refunding up to triple the amount collected. A court may declare the entire loan void, preventing recovery of even the principal. Willful violations can also lead to criminal prosecution under Penal Code §§ 639–639a. The California Department of Financial Protection and Innovation (DFPI) oversees financial institutions and enforces lending laws. Unlicensed or predatory lenders remain fully subject to California’s usury restrictions. Businesses may also charge a lawful “time-price differential” on credit sales—essentially a higher price for installment purchases—if the transaction is a genuine sale, not a disguised loan (Southwest Concrete Products v. Gosh Construction Corp., 51 Cal.3d 701 (1990)).

Need Help?

If you have questions about whether a loan or business financing arrangement complies with California’s usury laws, contact Bethel and Jacobs for experienced legal advice and guidance.