Legal Question in Business Law in California

Re: Maximum interest rate

The following is quoted from Article 15, Paragraph 1 of the California Constitution, and applies ONLY to loans that are not for personal, household or family purposes, in which case the maximum rate is 10%:

"....a rate not exceeding the higher of (a) 10 percent per annum or (b) 5 percent per annum plus the rate prevailing on the 25th day of the month preceding the earlier of (i) the date of execution of the contract to make the loan or forbearance, or (ii) the date of making the loan or forbearance established by the Federal Reserve Bank of San Francisco on advances to member banks under Sections 13 and 13a of the Federal Reserve Act as now in effect or hereafter from time to time amended (or if there is no such single determinable rate of advances, the closest counterpart of such rate as shall be designated by the Superintendent of Banks of the State of California unless some other person or agency is delegated such authority by the Legislature)."

There is a safe harbor law for larger business loans in Corporations Code section 25118.

If the borrower is incorporated in another state and the payments are to be made in that state, the laws of that other state would probably govern, and many other states would permit a higher rate of interest.

Another way to avoid inadvertently charging too much interest is to provide a term in the loan or note to the effect that any inadvertently excessive interest paid shall be treated as a repayment of principal. This will not work if the excessive interest payment was intentional rather than inadvertent.