California Legal Interest Rate: Caps, Exemptions, and Judgments

In California, the legal interest rate for most loans from a non-exempt lender is capped at 10% per year under the state constitution. That headline number is only part of the answer, though, because banks, credit unions, licensed finance companies, and several other categories of lender are exempt from the cap and follow their own rules. The rate that actually applies to your loan depends on who is lending the money, what you are using it for, and whether federal law overrides California’s limits.

The 10% Constitutional Cap

Article XV, Section 1 of the California Constitution sets the maximum interest rate a non-exempt lender can charge on a consumer loan at 10% per year. A consumer loan means money used primarily for personal, family, or household purposes. Real estate borrowing is carved out: if you borrow to purchase, build, or improve real property, the loan is not treated as a consumer loan even when the property is your home.¹

For non-consumer loans, including business financing and real estate loans, the cap is the greater of 10% per year or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month before the loan is signed.¹ As of late 2025, that discount rate was 3.75%, so the formula produced 8.75%, still below 10%.² The effective ceiling for both categories is currently the same 10%. If the discount rate climbs, the non-consumer formula floats with it and can rise above 10%.

The constitution also blocks lenders from disguising extra interest as fees, bonuses, commissions, or discounts. If the combined cost of the loan pushes the effective rate above the applicable cap, the loan is usurious no matter what the charges are called.¹

When No Rate Is Written Down

If a loan exists but the parties never agreed on an interest rate in writing, the constitution fills in 7% per year. This is not a cap. It is the rate a court will apply when the contract is silent, and the same 7% applies to unpaid account balances after a demand for payment.¹ For an informal loan between friends or family with no paperwork on rate, this is the number to expect.

Which Lenders Are Exempt

The exemption list is long enough that most loans Californians encounter fall outside the 10% cap entirely. The constitution itself exempts banks (state-chartered and national), credit unions, savings institutions, industrial loan companies, licensed pawnbrokers, personal property brokers, and any other class of lender authorized by statute.¹ The exemption also covers loans arranged by a California-licensed real estate broker and secured at least partly by a lien on real property.³

The catch-all for lenders “authorized by statute” is what lets the legislature add categories without amending the constitution. Licensed finance lenders under the California Financing Law are the most important group created that way.

In practice, the 10% constitutional cap mainly governs private lending: a relative loaning you money, an individual investor funding a deal, a private promissory note between acquaintances. Borrowing from a regulated institution almost always falls outside the constitutional cap, though other rate limits usually apply.

Rates a Licensed Finance Lender Can Charge

Finance lenders licensed under the California Financing Law are exempt from the constitutional cap but face a tiered rate structure that depends on the size of the loan.

For loans under $2,500, the maximum charges are calculated monthly against the unpaid principal balance, and each rate applies only to its slice of the balance:

2.5% per month on the first $225 (30% annualized)
2% per month on the amount between $225 and $900 (24% annualized)
1.5% per month on the amount between $900 and $1,650 (18% annualized)
1% per month on the amount above $1,650 (12% annualized)

Because the rates apply in slices, the blended cost drops as the loan grows.⁴

For loans with a principal between $2,500 and $10,000, the cap is 36% per year plus the federal funds rate published by the Federal Reserve, using the rate in effect on the first day of the month before the loan closes.⁵ This cap came in with AB 539 in 2019, which also barred prepayment penalties and set a minimum loan term of one year. Loans between $5,000 and $10,000 have a five-year maximum term.

For loans of $10,000 or more from a licensed finance lender, California sets no statutory rate cap. The rate is whatever you and the lender agree to, so contracts in this range deserve close reading.

How Federal Law Changes the Picture

National banks follow the interest rate rules of the state where the bank is located, not the state where the borrower lives. Under Section 85 of the National Banking Act, a national bank can charge interest at the rate permitted by its home state, or 1% above the Federal Reserve discount rate, whichever is greater.⁶ A bank chartered in a state with no usury cap can lend to Californians at rates far above 10%, and California’s constitution cannot stop it.

This rule, called interest rate exportation, is the reason most credit cards carry rates well above 10%. Card issuers are typically chartered in states like Delaware or South Dakota that impose no cap, and federal law lets them export the home-state rule everywhere.

A separate federal statute, the Depository Institutions Deregulation and Monetary Control Act, preempts state rate caps on most first-lien residential mortgages made after March 31, 1980, whichever type of lender originates them.⁷ State limits can still reach second liens, home equity loans, and origination fees on first-lien mortgages where preemption covers only the interest rate itself.

Payday Loans

California treats payday loans (formally, deferred deposit transactions) as a separate category with its own limits. The maximum loan amount is $300. The maximum fee is 15% of the check’s face amount, which works out to $45 on a $300 loan. No additional charges are permitted. The maximum term is 31 days. The dollar fee looks small, but annualized over a typical two-week loan, the effective APR runs into the hundreds of percent.

Rate Protections for Active-Duty Servicemembers

Two federal laws impose ceilings that override any higher California rate on loans to military borrowers.

The Military Lending Act caps most consumer credit extended to active-duty servicemembers and their dependents at a 36% Military Annual Percentage Rate. That figure includes interest, finance charges, credit insurance premiums, and fees such as application and participation charges.⁸

The Servicemembers Civil Relief Act handles debts that existed before military service began. It caps interest at 6% per year on those pre-service obligations, including car loans, credit cards, mortgages, home equity loans, and student loans, for the duration of active duty. For mortgages, the 6% cap extends an additional year after service ends.⁹ To get the benefit, the servicemember has to send the creditor a written request with a copy of military orders within 180 days after service ends. Once notified, the creditor has to forgive all interest above 6% back to the date orders were issued and refund any excess already paid.

Interest on Court Judgments

Once a California court enters a money judgment, the unpaid balance accrues interest at 10% per year under the Code of Civil Procedure. This post-judgment rate is separate from whatever rate applied to the underlying debt.¹⁰

A lower 5% rate applies to certain consumer debts for judgments entered on or after January 1, 2023: personal debts under $50,000 and medical expenses under $200,000. Personal debt here means obligations arising from transactions primarily for personal, family, or household use, so credit card balances, car financing, and payday loans qualify. Debts based on fraud, intentional wrongdoing, or unpaid wages do not get the reduced rate. The 5% rate also applies when a creditor renews an older judgment on or after that date.¹⁰

What Happens When a Lender Charges Too Much

A non-exempt lender who charges over the legal maximum loses more than just the excess. The first consequence is forfeiture of all interest on the loan. A court voids every dollar of interest, leaving the borrower obligated to repay only the principal. Payments already made get applied entirely to principal, with nothing credited as interest.³

The borrower can also sue for treble damages, meaning three times the usurious interest paid during the year immediately before filing. Timing is tight. A borrower has two years to sue for recovery of usurious interest paid, and only one year to claim treble damages from the date of each payment.³

A lender charging at least double the legal maximum can also face federal exposure. Under the RICO Act, a debt is an “unlawful debt” when the rate is at least twice the enforceable state or federal cap.¹¹ For a California lender bound by the 10% cap, a pattern of loans at 20% or higher can reach that threshold.

The Floor the IRS Sets on Private Loans

California caps the ceiling, but the IRS sets a practical floor. Under Section 7872 of the Internal Revenue Code, a loan made at a rate below the applicable federal rate, including a zero-interest loan, causes the IRS to treat the “forgone interest” as though it had been paid. For gift loans, the shortfall is treated as a gift from lender to borrower. For loans between an employer and employee or a corporation and shareholder, it becomes compensation or a distribution.¹²

Two exceptions matter. Loans of $10,000 or less between individuals are generally exempt, so long as the borrowed money is not used to buy income-producing assets. Gift loans of $100,000 or less get softer treatment: imputed interest is capped at the borrower’s net investment income for the year, and if that income is under $1,000, the IRS treats it as zero.¹² For a private lender in California, setting the rate somewhere between the applicable federal rate and 10% keeps you clear of both the IRS and the state constitution.

1
Justia Law. California Constitution Article XV – Usury – Section 1
2
Federal Reserve Discount Window. Discount Rates
3
California Attorney General. California Constitution Article XV Usury
4
California Legislative Information. California Financial Code FIN 22303
5
California Legislative Information. California Financial Code 22304.5
6
Office of the Law Revision Counsel. 12 USC 85 – Rate of Interest on Loans, Discounts and Purchases
7
Federal Deposit Insurance Corporation. Federal Interest Rate Authority
8
Consumer Financial Protection Bureau. Military Lending Act (MLA)
9
U.S. Department of Justice. 6% Interest Rate Cap for Servicemembers on Pre-service Debts
10
California Legislative Information. California Code of Civil Procedure 685.010 (2025)
11
U.S. Department of the Treasury. 18 USC 1961 – Definitions
12
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates