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Exemption from California Usury Law

California has a usury law that limits loans from an unregulated lender to a discount rate + 5%, and never lower than 10%. The first question is does this interest need to be simple interest or can it be compounding?

Second, California Section 25118 establishes exemptions to the usury law for startup companies. If for example the loan or line of credit is $300K or more, and if you have a pre-existing business or personal relationship with the lender, and if the proceeds are for business use not personal, you can be exempt from the usury law. In the case where the exemption applies, is there a requirement that the loan be simple interest? In the case the exemption applies is there any limitation on the maximum interest rate?

Reply to
W
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This is more a legal question than a tax one. But let's see if I can help.

First of all California usury puts an upper limit on interest. So your statement, "never lower than 10%" does not mean that interest under 10% can't be charged. It only means that the maximum allowable interest won't be under 10%.

As I recall compound interest is allowed, though I haven't researched this issue in quite some time.

When it is not otherwise stated, interest is simple interest. But there is no restriction against having compound interest in California law that I am aware of.

Reply to
Stuart A. Bronstein

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