Generally, the law recognizes parties’ freedom to enter into a contract under the terms of their choosing. Parties can freely determine the terms of their personal and business affairs unless the agreement is illegal. However, one area where New York law steps in to impose limitations on parties’ freedom of contract is with usury laws.

Usury laws prevent a party from charging excessive interest rates. The purpose is to protect consumers from unscrupulous lending practices. The rules governing usury include the following:

1. The maximum interest rate is set by law. Under New York’s General Obligation Law, an interest rate over 16% is civil usury. Criminal usury is set at 25%.
2. A usurious interest rate is a defense to non-payment. While individuals can claim civil usury as a defense, corporations can only claim criminal usury as a defense.
3. A usurious contract is void. Generally, a borrower can walk away from the contract and keep the borrowed funds. Borrowers can also seek to recover their excess payments over the 16% or 25% interest rate.
4. There are exceptions to the usury regulations to protect an unsophisticated lender. If a borrower intentionally sets a usurious interest rate in order to avoid the obligation to repay, usury will not be a defense to repayment. Instead, a court will cut the interest rate to the statutory maximum. This is known as the estoppel in pais The exception arises when a special relationship exists between the parties (ex. family, close friends, attorney and client, etc.) or where the lender was a novice in financial matters and the lender relied on the borrower. It protects an unsophisticated lender and ensures that a borrower cannot ask for a high interest rate so he/she can later declare the contract void and keep the funds.
5. Only the original borrower can assert the usury defense. If the borrower assigned the loan or sold property subject to the loan, the subsequent borrower cannot claim usury to avoid the contract.
6. Usury applies only to loans. A party who makes an investment with a preferred return cannot claim usury.

If you plan to make or receive a loan or you already have a potentially usurious loan, speak with a qualified attorney about the terms of the agreement.

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