Usury Laws In California (2026): Everything You Need To Know

California has some of the strictest interest rate laws in the United States. These laws protect borrowers from predatory lending. They also create serious risks for lenders who don’t follow the rules.

If you’re thinking about lending or borrowing money in California, you need to understand these laws. Breaking usury rules can cost lenders thousands of dollars in penalties. It can even lead to criminal charges in extreme cases.

What Is Usury?

Usury means charging too much interest on a loan. It’s when a lender asks for more interest than California law allows.

California’s usury laws are found in Article XV, Section 1 of the California Constitution. These laws limit how much interest most lenders can charge on loans. The rules apply to both personal loans and business loans.

Interest includes anything of value a lender gets from a borrower. This covers fees, bonuses, commissions, and other charges – not just the stated interest rate.

A “forbearance” is also covered by usury laws. This happens when a lender agrees to extend a loan’s due date. Usually the borrower pays extra interest for this extension.

Basic Usury Laws

Consumer Loans

For personal, family, or household loans, the maximum interest rate is 10% per year. This applies to money borrowed for:

Personal expenses
Family needs
Household purchases
Credit cards (in some cases)

Home loans for buying, building, or improving real estate don’t count as personal loans. They follow different rules.

Business and Other Loans

For business loans and other non-consumer loans, the rate is either 10% per year OR 5% plus the Federal Reserve discount rate – whichever is higher.

Currently, this makes the cap between 10-12% for business loans. The exact rate depends on what the Federal Reserve was charging on the 25th day of the month before the loan was made.

How Interest Is Calculated

The percentage rates are based on simple interest on the unpaid balance. This is not compound interest.

For example: A $1,000 loan for one year at 10% would cost $100 in interest. But if you make payments during the year, the interest decreases as your balance goes down.

Who Is Exempt From Usury Laws

Many lenders don’t have to follow California’s 10% limit. These exemptions are complicated and have many rules.

Licensed Financial Institutions

Banks, credit unions, and licensed finance lenders are exempt from usury laws. They can charge whatever rates their licenses allow.

This includes:

National banks
Federal credit unions
California Finance Law (CFL) lenders
Licensed pawnbrokers
Insurance companies

National banks and federal credit unions can charge rates that are legal in their home state.

Real Estate Broker Loans

Loans arranged by licensed real estate brokers and secured by property are usually exempt. But there are specific requirements.

The broker must do more than just handle paperwork. They must actually arrange or negotiate the loan. The broker must also be compensated for their work.

Large Business Loans

Business loans of $300,000 or more to corporations or LLCs may be exempt. There are specific conditions that must be met.

Loans to borrowers with at least $2 million in assets may also be exempt if both parties are considered “sophisticated”. This means they can protect their own interests.

Credit Cards and Retail Purchases

Credit card companies take the position that third-party credit cards (Visa, MasterCard, etc.) are not subject to usury limits. They often charge much higher rates.

Under the Unruh Act, retail installment contracts and credit card agreements are exempt from usury rules.

Penalties and Consequences

Breaking California’s usury laws leads to severe penalties. The consequences are harsh even if the lender didn’t mean to break the law.

Civil Penalties for Lenders

Lenders who charge illegal interest may have to forfeit all interest collected. Borrowers may be entitled to up to triple the amount they paid.

Borrowers can sue for all money they paid during the two years before filing a lawsuit. They can also seek three times the interest paid during the 12 months before filing suit.

The borrower can get a court order to cancel all future interest on the loan. This can turn a profitable loan into an interest-free loan.

Time Limits for Claims

Borrowers must act quickly. The deadline to recover interest payments is two years. The deadline to get triple damages is only one year.

If a lender sues to collect on a loan, the borrower can claim usury as a defense without any time limit.

Criminal Charges

Criminal charges are possible for willful violations. Loan sharking is a felony that can result in up to five years in prison.

A lender who willfully receives illegal interest is guilty of loan sharking under the Penal Code.

Other Consequences

In some cases, courts may declare the entire loan void and unenforceable. This means the lender can’t even recover the money they loaned.

If the lender’s conduct is fraudulent or oppressive, they may have to pay punitive damages.

Special Circumstances

Several situations require extra attention under California usury law.

Loan Modifications

Recent court decisions have created new risks when modifying loans. Even if the original loan was exempt, a modification might not be.

Unlicensed note investors must be careful when modifying loans. Changes could trigger usury compliance issues.

Fees and Charges

Service charges that are just disguised interest can trigger usury violations. Only legitimate fees for real services are allowed.

Legitimate third-party costs don’t count as interest. This includes legal fees, title insurance, recording fees, and escrow fees.

Late charges don’t count as interest since late payment is voluntary by the borrower.

Joint Ventures and Investments

If a transaction is structured as a joint venture or investment rather than a loan, it may not be subject to usury laws. But the documentation must clearly show risk-sharing.

Unlicensed Lenders

Private lenders and individuals who loan money are usually subject to usury limits. Even loaning money to a friend or family member can trigger these rules.

Unlicensed lenders can only make one private mortgage loan per year under certain regulations.

How to Stay Compliant

Following these steps can help lenders avoid usury violations.

Get Legal Advice

Before making any loan, consult a California attorney familiar with usury and finance laws. The rules are complex and the penalties are severe.

Check All Exemptions

Before structuring a loan, verify whether it falls under any usury exemptions. Don’t assume an exemption applies without checking the specific requirements.

Calculate True Interest Rate

Add up all fees, charges, and interest to find the true annual percentage rate. Courts take a broad view of what counts as interest.

Document Everything Properly

If structuring a deal as a joint venture, make sure the paperwork shows risk-sharing and doesn’t guarantee returns.

Include Safety Clauses

Include a provision that if any amount is deemed usurious, the lender can apply the excess to reduce principal or refund it to the borrower.

Work With Licensed Professionals

Unlicensed lenders can work with a licensed broker to arrange the loan and avoid usury restrictions.

What Borrowers Should Know

Borrowers have important rights under California usury law.

Check Your Loans

Borrowers should examine all loans from non-financial institutions to see if usury laws apply. Many people don’t realize they have these protections.

Act Quickly

Time limits are strict. You have two years to recover interest payments and one year for triple damages.

Know Your Rights

Even if you agreed to high interest rates, the loan might still be illegal. Your agreement to pay doesn’t protect the lender if they charged too much.

Get Help

If you think you’re paying illegal interest, contact a lawyer who knows usury law. Many attorneys offer free consultations for these cases.

Recent Legal Developments

California usury law continues to evolve through court decisions.

The Moon Case Impact

A recent Ninth Circuit decision changed how loan modifications are handled. Even exempt loans can become subject to usury law if modified improperly.

This decision affects many real estate lenders and private lenders. It’s now riskier to modify existing loans.

Broker Requirements

Courts have increased the level of broker participation required for the real estate exemption. Brokers must do more than just handle paperwork.

Enforcement Trends

The California Department of Financial Protection and Innovation is taking more enforcement actions against unlicensed lenders.

Frequently Asked Questions

Can I charge more than 10% if the borrower agrees?

No. Even if the borrower begs to pay higher interest, non-exempt lenders are limited to 10% per year. The borrower’s agreement doesn’t matter.

Are credit cards subject to usury laws?

Major credit card companies claim exemption from California usury laws. They often charge rates far above 10%. However, some credit arrangements may still be subject to these limits.

What if I didn’t know about the usury law?

Ignorance of the law is no defense. The lender’s knowledge doesn’t matter – usury is usury. You’re responsible for knowing the law.

Can I fix a usurious loan?

It may be possible to correct a usurious loan if both parties agree and the lender credits the borrower with usurious interest already paid. But this requires careful legal work.

Do payday loans follow usury rules?

Licensed payday lenders are exempt from California’s usury laws. But they must follow other state licensing requirements. Unlicensed payday lenders would be subject to the 10% limit.

What about peer-to-peer lending?

Most peer-to-peer lending platforms use licensed lenders or have other exemptions. But individual peer-to-peer loans between unlicensed parties would likely be subject to usury limits.

Can I charge different rates for different types of loans?

Yes. Consumer loans are limited to 10%. Business loans can be higher – either 10% or the Federal Reserve rate plus 5%, whichever is greater. But you must qualify for the business loan rate.

Final Thoughts

California’s usury laws are among the most complex in the nation. They protect borrowers from predatory lending while creating serious traps for unwary lenders.

The key is understanding that these laws apply to most private lenders. Banks and licensed institutions have exemptions, but individuals and unlicensed businesses usually don’t.

If you’re lending money, get legal advice before setting interest rates. If you’re borrowing, know your rights and act quickly if you think you’re paying illegal interest.

The penalties for violating these laws are severe. But with proper planning and legal guidance, both lenders and borrowers can navigate California’s usury laws successfully.