By: Martin M. Shenkman, CPA, MBA, JD

Usury laws, which differ from state to state, provide restrictions on the amount of interest that can be charged on a loan. When engaging in various types of loan transactions and structures care should be taken to ascertain whether or not the usury laws of the state law which govern the transaction will be violated. If there is a risk of violating a usury law the implications of that should be carefully weighed. The usury laws could limit the interest that can be charged, eliminate all interest or have other implications. Some usury statutes provide exceptions if the borrower is a corporation (presumably not needing the protection of the statute), etc. Some loan/note/debt forms address the usury rules by stating that if the interest rate exceeds the maximum interest rate allowed by law that only the maximum rate may be charged. While such a clause to save the transaction (called a "savings provision") may be used as a precaution, it should not be relied up to the exclusion of having a local attorney review and explain the implications of the statute to your transaction. Usury rules can sometimes be triggered in unexpected circumstances. For example, a Graegin loan (a special structure of note used to loan money to an estate to pay estate tax that is intended to provide a large deduction to the estate for all interest over the life of the loan) may inadvertently trigger usury rules if interest rate for the entire loan is paid after an early default. Interest rate charges as well as usury rules should also be considered in the context of any religious restrictions that may apply to the charging of interest in the particular transaction. Both Islamic and Jewish law provide restrictions on interest.

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