California usury law caps interest at 10% per year on most private loans made for personal, family, or household purposes, with a slightly different formula for business and investment loans. The rule sits directly in the state constitution, in Article XV. In practice, though, the cap rarely touches banks, credit unions, or licensed finance companies, because a long list of exempt lenders and federal preemption carve most professional lending out of its reach. Where the cap does bite is private lending between individuals and businesses without a lending license — and there, the penalties for getting it wrong are severe.
The Rate Ceilings in Article XV
Article XV of the California Constitution sets two different ceilings, and the purpose of the loan decides which one applies.
- Loans for personal, family, or household use are capped at 10% per year, calculated as simple interest on the unpaid balance. Loans used to buy, build, or improve real property don’t count as personal-use loans for this purpose, even when the property is the borrower’s home.1Justia Law. California Constitution Article XV Section 1
- All other loans, including business and investment loans, are capped at the higher of 10% per year or 5% plus the rate the Federal Reserve Bank of San Francisco charges on advances to member banks. The Fed rate used is the one in effect on the 25th day of the month before the loan contract is signed.1Justia Law. California Constitution Article XV Section 1
The floating formula only pushes the ceiling above 10% when the Fed rate exceeds 5%. That has happened in past high-rate cycles, so the formula isn’t just decorative, but for most loans in most years the effective ceiling is 10%.
The constitution captures every form of compensation the lender receives. Fees, bonuses, commissions, discounts, and any other charges the borrower pays for the use of the money all count as interest for usury purposes.1Justia Law. California Constitution Article XV Section 1 A lender who charges 9% stated interest plus a 3% origination fee has effectively charged 12%, and that is usurious.
How the True Rate Is Calculated
The stated rate on a promissory note is just the starting point. California courts look at every dollar the lender receives as part of the deal and recharacterize hidden compensation as interest. Processing fees, commitment fees, and steep closing discounts get folded back into the interest calculation and spread over the loan’s expected life. The resulting effective annual rate is what gets compared to the constitutional ceiling.
This substance-over-form approach means creative structuring doesn’t work. Renaming charges, splitting them into side agreements, or burying them in fine print won’t insulate a lender when the total cost of borrowing exceeds the cap. Compounding interest can also push a loan into usurious territory, because the constitutional limit is measured as simple interest on the unpaid balance.
Who Is Exempt from the Cap
The exemption list is long enough that the usury cap functions more like a backstop than a general rule. Article XV specifically exempts:
- Banks operating under California or federal law.
- Building and loan associations under the Building and Loan Association Act.
- Credit unions incorporated and operating under California or federal credit union laws.
- Industrial loan companies operating under the Industrial Loan Company Act.
- Licensed pawnbrokers and personal property brokers.
- Loans made or arranged by a licensed California real estate broker, when secured at least in part by a lien on real property.
- Nonprofit agricultural cooperatives lending in connection with their agricultural activities.
- Any class of persons the legislature authorizes by statute.2California Legislative Information. California Constitution Article XV
That last category is the one that swallows the most ground. The legislature has used it to exempt licensed California Finance Lenders, among others, which effectively removes most professional lending from the usury cap.3Department of Financial Protection and Innovation. About California Financing Law
The Corporations Code Exemption for Larger Deals
California Corporations Code Section 25118 creates a separate exemption for sophisticated borrowers and larger loan amounts. Two common paths qualify. First, if the borrowing entity, or an affiliate guaranteeing the debt, has at least $2 million in total assets according to recent financial statements prepared under generally accepted accounting principles, the loan is exempt. Second, debt instruments totaling at least $300,000 in original face amount at the time of issuance are exempt.4California Legislative Information. California Code Corporations Code CORP 25118
Both paths come with strings. The lender and borrower must have a preexisting personal or business relationship, and the lender or its advisers must have enough financial sophistication to evaluate the risks. The exemption does not apply to loans primarily for personal, family, or household purposes. This is the provision that typically covers private commercial deals between experienced parties, such as a real estate investor borrowing from a wealthy individual.
Rate Caps for Licensed Finance Lenders
A California Finance Lender license removes a lender from the constitutional cap but does not mean the lender can charge whatever it wants. The California Financing Law imposes its own ceilings, particularly on smaller consumer loans.
For consumer loans with a principal of at least $2,500 but less than $10,000, a licensed finance lender cannot charge more than 36% per year plus the Federal Funds Rate.5Department of Financial Protection and Innovation. New Requirements for Licensees Making Consumer Loans of $2,500 to $10,000 California Financing Law For loans of $5,000 or more, any administrative fee is folded into that rate calculation. For loans between $2,500 and $5,000, an administrative fee of up to $75 may be charged on top of the rate cap.
Loans under $2,500 are governed by a separate schedule in the Financial Code that sets maximum monthly rates on the unpaid balance. Loans above $10,000 generally have no statutory rate ceiling beyond the terms of the license, though the DFPI retains supervisory authority.
Penalties for Charging Usurious Interest
California’s usury penalties are among the harshest in the country, and they hit a lender from multiple directions.
Civil Consequences
The primary civil penalty is forfeiture of all interest on the loan, not just the excess over the legal cap. A lender who charges 12% when the cap is 10% doesn’t just lose the extra 2%. The borrower owes zero interest and repays only the principal. This all-or-nothing rule gives the cap real teeth.
Beyond canceling future interest, a borrower can sue to recover interest already paid. On top of that, a court has discretion to award treble damages on interest paid within the one-year period immediately before the lawsuit was filed. When the lender is the one who sues to collect, the borrower can raise usury as an offset and recover all interest paid over the life of the loan, without any statute-of-limitations restriction.
Intent doesn’t matter. A lender who genuinely believed the rate was legal faces the same forfeiture as one who knowingly overcharged. California courts treat usury as an objective test: either the effective rate exceeded the cap when the loan was made, or it didn’t.
Criminal Penalties
Usury is also a crime. Under Civil Code Section 1916.3(b), anyone who receives usurious interest can be sentenced to up to five years in state prison or up to one year in county jail. Prosecution is rare in practice, but the statute gives prosecutors a tool for the most egregious cases.
How Long a Borrower Has to Act
Timing matters if you’re a borrower thinking about a usury claim. Two limitation periods apply, depending on what you’re seeking.
For recovery of interest already paid, you have two years to bring an action, and only interest paid within that two-year window is recoverable. In some cases the clock doesn’t start until after the loan is fully repaid. The window for treble damages is shorter: one year, measured by interest paid in the year before filing.
There’s one significant exception. If the lender sues you first to enforce the loan, you can raise usury as a defense and seek an offset for all interest paid over the life of the loan, with no statute of limitations on that defensive claim. In practice, this is where many borrowers first discover a usury problem — when a lender comes to collect and an attorney starts examining the loan terms.
Why Your Credit Card Charges 24%
If California caps interest at 10%, why does your credit card charge more than twice that? The answer is federal preemption. The National Bank Act, originally passed in 1864, lets a nationally chartered bank charge the interest rate permitted by the state where the bank is located, not where the borrower lives.6Office of the Law Revision Counsel. 12 USC 85
The Supreme Court confirmed this in Marquette National Bank v. First of Omaha Service Corp., holding that a national bank headquartered in Nebraska could charge Nebraska’s rates to customers in Minnesota, even though Minnesota had a lower cap. The Court acknowledged that this “exportation” of interest rates weakens state usury laws, but said any fix would have to come from Congress.7Justia Law. Marquette Nat. Bank v. First of Omaha Svc. Corp. 439 U.S. 299 (1978)
That’s why major credit card issuers cluster in states like Delaware and South Dakota, which have no usury ceiling. A bank chartered in one of those states can lend to California residents at whatever rate the market will bear, and the 10% cap simply doesn’t apply.
Federal RICO Exposure at Double the Cap
Charging usurious interest can also trigger federal criminal liability under the Racketeer Influenced and Corrupt Organizations Act. RICO defines “unlawful debt” to include any debt from a lending business where the rate charged is at least twice the enforceable rate under state or federal law.8Office of the Law Revision Counsel. 18 U.S. Code 1961 – Definitions In California, where the enforceable rate is typically 10%, a private lender charging 20% or more on a personal loan can meet that threshold. Federal prosecutors generally reserve RICO for organized or systematic lending operations rather than isolated transactions, but the statute gives them broad reach when a pattern is there.