How much interest can I be charged?

Parties in New Jersey are permitted to charge relatively high rates of interest in many transactions.  In the state, there are two separate types of usury, civil and criminal.  The levels of interest rates constituting civil and criminal usury, and the exceptions thereto, are governed by separate statutes.

Civil usury rates in New Jersey are governed by N.J.S.A. 31:1-1 et Seq.  N.J.S.A. 31:1-1(a) provides that civil usury is any rate above 6% for an agreement that is not in writing, and any rate above 16% where there is a written contract specifying the interest rate.  Pursuant to N.J.S.A. 31:1-3, when a lender charges a higher rate of interest than what is permitted by the statute, the only amount that may be recovered by the lender is “the amount or value actually lent, without interest or costs of the action . . . If any premium or illegal interest shall have been paid to the lender, the sum or sums so paid shall be deducted from the amount that may be due as aforesaid, and recovery had for the balance only.” 

There are many exceptions to these civil usury rates.  First, it should be noted that federal law preempts all state usury law (see Depository Institution Deregulation and Monetary Control Act “DIDAMCA” – 12 U.S.C. 3803).  Accordingly, financial institutions may make loans at any rate of interest up to criminal usury limits, and other lenders, such as mortgage companies who are funded by federal programs, also are not subject to the New Jersey caps.  New Jersey courts have also carved out other transactions, holding that purchases under revolving credit accounts, installment loan purchases, and purchases under credit card accounts are exempted from the civil usury statute under what is known as the “time-price differential” doctrine.  The doctrine creates the legal fiction that extending credit is not a loan, but merely an adjustment in price for the privilege of delaying payment.  See, e.g. Steffenauer v. Mytelka & Rose, Inc.,87 N.J. Super. 506, 510-517 (App. Div. 1965),aff’d per curiam, 46 N.J. 299 (1966).  In yet another exception, pursuant to  N.J.S.A. § 31:1-1(e)(1), loans or forbearances of $50,000 or more, except for loans secured by a first lien on residential real property, are also exempt from the civil usury statute.

Where loans made to business entities are concerned, N.J.S.A. 31:1-6 provides, in pertinent part, that “No corporation, limited liability company or limited liability partnership shall plead or set up the defense of usury to any action brought against it to recover damages or enforce a remedy on any obligation executed by said corporation, limited liability company or limited liability partnership.”  It has been noted that the application of this section to corporations should be restricted in order to afford “sympathetic sweep” to the State’s policy against usury. Lesser v. Strubbe, 56 N.J.Super. 274 (Ch.1959), remanded on other grounds 67 N.J.Super. 537, certification granted 36 N.J. 140, affirmed 39 N.J. 90.  Nevertheless, the statute has been applied to protect those that have made loans of money and have taken paper or bonds of a corporation. Fine v. H. Klein, Inc., 10 N.J.Super. 295 (1950).  

In the Fine case, corporate promissory notes containing acceleration-on-default clauses providing for attorney’s collection fees and in part secured by a chattel mortgage were found to be “obligations” irrespective of whether the notes remained in the hands of the original creditor or came into the hands of the public on the market. Id.  The Fine court granted Plaintiff’s motion to strike Defendant’s usury defense, and noted that “Since the defense of usury cannot be pleaded by the corporate maker of the notes, it is likewise unavailable to the individual endorsers on the notes.” Id. at 300. (citing Commercial Funding Corp. v. Melroy Const. Co. , 106 N.J. Eq. 11 (Ch. 1930); Liebers v. Plainfield, &c., Bldg. Co. , 108 N.J. Eq. 391 (Ch. 1931)). 

In addition to the above civil usury limits and exceptions, another important consideration is New Jersey’s criminal usury statute.  Pursuant to N.J.S.A. 2C:21-19, the criminal usury limitations apply to all loans subject to State of New Jersey law. The maximum permissible rate is 50% for corporations and 30% for non-corporate borrowers.  The language of the statute outlines the different degrees of criminal usury, and notes that criminal usury is a crime in the second degree when an interest rate charged on a loan is more than 50% per year.      

While the state of New Jersey takes a relatively liberal approach to the issue of usury, given the foregoing case law and statutes, individuals and businesses must tread carefully when making loans that are in excess of the above referenced limits. 

Spencer J. Rothwell, Esq. is an Associate Attorney practicing in the firm’s Land Use, Litigation and Real Estate departments

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One Response to How much interest can I be charged?

  1. Eric Robinson May 14, 2016 at 5:22 pm #

    I would like to chat with an attorney about using loss. We have a mortgage that says 16.5% but with additional charges it looks like it’s approaching over 30%

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