As a law firm involved in commercial debt collection and debtor-creditor matters in the New York metropolitan area (Manhattan, Brooklyn, Queens, etc.) and New Jersey, this is an issue that we face a lot. The answer, like many things involving the law, is that is depends on the facts involved. It is easier to answer to the question by describing what is not allowed.
1. What is Usury and When is a Loan Usurious?
New York makes it illegal to charge interest exceeding eighteen percent (16%) per year on loans up to $250,000. This works out to a monthly rate of one and a half percent (1.33%) per month. If a contract provides for interest above this amount it is void and unenforceable, unless it is subject to an exception. For example, credit cards and car loans issued by national banking associations (they usually have “N.A.” after their name) are subject to an exception contained in federal law that exempts them from this restriction. (It doesn’t make sense that you are subject to this restriction and the bank are not — but the banks have better lobbyists than you do.)
We often see self-prepared agreements that have been prepared by businessmen and individuals — without the benefit of a lawyer — that provide for interest above the legal rate described above. When it comes to enforcement of these agreements often interest will be denied altogether. In addition, in some circumstance the party who drafted the agreement may even be subject to liability for criminal usury. The defense of usury is not available, however, to corporations or limited liability companies.
2. What is Criminal Usury?
In New York it is a crime to charge interest above 25% per year on loans up to $250,000, subject to certain exceptions. This works out to interest of 2.08% per month. If someone receives interest above this amount he or she can be criminally prosecuted and if found guilty can be subject to fines and/or imprisonment. Criminal usury in the first degree is a Class C felony. Unfortunately, many people who enter into self-prepared agreements — acting as their own lawyers but without knowledge of the applicable law — think that just because the credit card companies can charge them interest rates above 20% year that they can receive interest from others at similar rates.
3. Benefit of Attorney Prepared Agreement
I am always surprised when businessmen and other individuals come to us seeking our services to enforce a promissory note or agreement providing for interest on past due amount — involving large sums of money at stake — that they have drafted themselves without the benefit of a lawyer. Where a large amount of money is at stake it is foolish to not hire a lawyer to prepare the loan documentation. A lawyer prepared agreement will often contain provisions that may insulate an otherwise invalid agreement from being invalidated, such as a “savings clause” or other similar provisions. Some legal forms provides, such as Blumberg Legal Forms have reasonably good form documents for simple things such as a promissory note available for purchase in blank, but if they are not filled out properly they are often not much better than a poorly drafted self-prepared agreement.