California’s usury law caps interest on most private loans at 10% per year, written directly into Article XV of the state constitution. The limit sounds strict, but a long list of exempt lenders means it rarely touches banks, credit unions, licensed finance companies, or the credit cards in your wallet. In practice, the cap mostly governs loans between private individuals and from unlicensed businesses. If you are on either side of one of those loans, the exact ceiling, the exemptions, and the penalties for crossing the line all matter.
The Two Rate Ceilings
Article XV sets two caps, and which one applies depends on what the borrowed money is for.1Justia Law. California Constitution Article XV Section 1
- Loans for personal, family, or household use are capped at 10% per year, calculated as simple interest on the unpaid balance. Loans used to buy, build, or improve real property are not treated as personal-use loans for this purpose, even if the property is your home.
- All other loans, including business and investment loans, are capped at the higher of 10% per year or 5% plus the rate the Federal Reserve Bank of San Francisco charges on advances to member banks. The applicable Fed rate is the one in effect on the 25th day of the month before the loan contract is signed.
When a contract is silent on interest, California’s default rate is 7% per year. The floating formula for non-consumer loans only pushes the ceiling above 10% when the Fed rate climbs past 5%, which has happened in past high-rate cycles.
What Counts as Interest
The stated rate on a promissory note is just the starting point. The constitution sweeps in every form of compensation the lender receives for the use of the money: fees, bonuses, commissions, discounts, and any other charges the borrower pays all count as interest for usury purposes.1Justia Law. California Constitution Article XV Section 1 A lender who writes a 9% note and tacks on a 3% origination fee has effectively charged 12%, and that loan is usurious.
Courts take a substance-over-form approach. Calling a charge a “processing fee” or a “commitment fee,” splitting it into a separate agreement, or burying it in closing documents does not insulate the lender. The fees get spread over the loan’s expected life and folded into an effective annual rate, which is then measured against the cap. Compounding can also push an otherwise legal rate over the line, because the constitutional ceiling is expressed as simple interest.
Who Is Exempt From the 10% Cap
The exemption list is long enough that the usury cap functions more as a backstop than a general rule. Article XV itself exempts banks (state or federal), building and loan associations, state and federal credit unions, industrial loan companies, licensed pawnbrokers and personal property brokers, loans made or arranged by a licensed California real estate broker and secured at least in part by real property, and nonprofit agricultural cooperatives when lending in connection with their agricultural activities.2California Legislative Information. California Constitution Article XV
The constitution also lets the legislature add classes by statute without a constitutional amendment. That provision has been used to exempt licensed California Finance Lenders, which removes most professional lending from the usury cap entirely.3Department of Financial Protection and Innovation. About California Financing Law
Why Your Credit Card Charges More Than 10%
Federal preemption is why California’s cap does not reach your credit card. The National Bank Act lets a nationally chartered bank charge the interest rate allowed in the state where the bank is located, not the state where the borrower lives.4Office of the Law Revision Counsel. 12 USC 85 In Marquette National Bank v. First of Omaha Service Corp., the Supreme Court held that a Nebraska-chartered bank could charge Nebraska rates to Minnesota customers even though Minnesota had a lower ceiling. The Court acknowledged that this exportation of rates weakens state usury laws and said any fix would have to come from Congress.5Justia Law. Marquette Nat. Bank v. First of Omaha Svc. Corp. 439 U.S. 299 (1978) This is why major issuers cluster in states like Delaware and South Dakota, which have no usury ceiling at all.
The Corporations Code Carve-Out for Larger Deals
California Corporations Code Section 25118 adds a separate exemption aimed at sophisticated borrowers and substantial transactions. A loan is exempt if either of two tests is met: the borrowing entity (or an affiliate guaranteeing the debt) has at least $2 million in total assets per recent financial statements prepared under generally accepted accounting principles, or the debt instruments total at least $300,000 in original face amount at issuance.6California Legislative Information. California Code Corporations Code CORP 25118
Both paths come with conditions. The lender and borrower must have a preexisting personal or business relationship, and the lender (or its advisers) must have the financial sophistication to evaluate the risks. The exemption does not reach loans made primarily for personal, family, or household purposes. In practice, this is the provision that covers private commercial loans between experienced parties, such as a real estate investor borrowing from a wealthy individual.
Rate Limits for Licensed Finance Lenders
A California Finance Lender license removes the constitutional cap, but it does not give the lender a free hand. The California Financing Law imposes its own ceilings on smaller consumer loans. For a consumer loan with a principal of at least $2,500 but less than $10,000, a licensed finance lender cannot charge more than 36% per year plus the Federal Funds Rate.7Department of Financial Protection and Innovation. New Requirements for Licensees Making Consumer Loans of $2,500 to $10,000 California Financing Law For loans of $5,000 or more, any administrative fee is folded into that rate calculation. For loans between $2,500 and $5,000, a lender may charge an administrative fee of up to $75 on top of the rate cap.
What Happens When a Lender Charges Too Much
California’s penalties for usury hit hard, and they come from several directions at once.
The Lender Loses All Interest
The main civil consequence is forfeiture of all interest on the loan, not just the amount above the cap. A lender who charged 12% when the ceiling was 10% does not simply refund the extra 2%. The borrower owes zero interest and repays only principal. That all-or-nothing rule is what gives the cap real teeth.
Intent is not a defense. California treats usury as an objective test: either the effective rate exceeded the cap when the loan was made, or it did not. A lender who honestly thought the rate was legal faces the same forfeiture as one who knew better.
Treble Damages
A borrower can also sue to recover interest already paid. On top of straight recovery, a court has discretion to award treble (triple) damages on interest paid during the one-year period immediately before the lawsuit is filed.
Criminal and RICO Exposure
Usury is also a crime. Under Civil Code Section 1916.3(b), a person who receives usurious interest can be sentenced to up to five years in state prison or up to one year in county jail. Prosecutions are rare but available for egregious cases, particularly predatory lending to vulnerable borrowers.
Federal criminal liability can attach under the Racketeer Influenced and Corrupt Organizations Act. RICO defines “unlawful debt” to include any debt from a lending business where the rate charged is at least twice the enforceable rate under state or federal law.8Office of the Law Revision Counsel. 18 U.S. Code 1961 – Definitions With California’s enforceable rate typically at 10%, a private lender charging 20% or more on a personal loan can meet that threshold. Federal prosecutors generally reserve RICO for organized or systematic lending rather than isolated loans, but the statute gives them broad reach when a pattern exists.
How Long You Have to Sue
Two separate limitation periods apply, depending on what the borrower is after. To recover interest already paid on a usurious loan, the window is two years, and only interest paid during that two-year window is recoverable. In some cases the clock does not start running until after the loan is fully repaid. The window for treble damages is shorter: one year, measured against interest paid in the year before filing.
There is one important exception. If the lender sues the borrower first to enforce the loan, the borrower can raise usury as a defense and seek an offset for all interest paid over the life of the loan, with no statute of limitations on that defensive claim. This is where most borrowers discover a usury problem as a practical matter, when the lender comes to collect and an attorney starts examining the loan documents.