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I recently had a conversation with an attorney in Louisiana, who mentioned that in that state, the annual interest rate on a promissory note was limited to 12%. I told him that in California story is much different.

Article 15 (Usury) of the California Constitution states (simplifying a bit) that the annual interest rate on a loan or forbearance (refraining from requiring payment for a period of time) is limited as  follows:

• If arising from money or goods supplied for personal, family or household purposes, the maximum interest rate is 10%.
• If arising from money or goods supplied other than for personal, family or household purposes, the maximum interest rate is the greater of (a) 10% or (b) 5% plus the rate charged by the Federal Reserve Bank of San Francisco on advances to its member banks.
• If the agreement between the parties does not specify an interest rate, it will be 7%.

Key point #1: The constitutional usury rate does not apply in situations other than loans and forbearances. So, for example, a promissory note executed in connection with the purchase and sale of a business, or late-payment terms in an agreement for the performance of professional services, may have whatever interest rate the parties may decide is appropriate.

Key point #2: In addition to the Constitutional requirements, there are quite a few situations where statutes prescribe maximum interest rates in specified circumstances, such as shared-appreciation loans, secured transactions, corporate securities, financial lenders, and government. So even in a business or professional context, there may be a restriction on the applicable interest rate.

Graphic credit: Microsoft Office Online

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.