Usurious Contracts: Identifying Illegal Interest Rates

The general rule in Maryland is that lenders may not charge an effective rate of simple interest greater than six percent annually.  An effective rate of simple interest is a flat interest rate, not a compound interest.  However, because lenders can require borrowers to pay interest as interest accrues, calculating the amount of interest charged is a little more complicated than just multiplying the principal by the rate of interest.  Despite the general rule, there are many circumstances when lenders can and do charge more six percent. 

For example, a lender may charge up to 24 percent interest if there is a written loan and the collateral is not a savings account, the loan is unsecured, or the loan is not secured by real property.  (If the loan was made before July 1, 1982, the interest rate is limited to 18 percent.)  However, if a lender is going to charge a rate of interest of 24 percent, the loan needs to meet a few requirements. These requirements can be found in Md. Commercial Law Code Ann. §12-103.  Typically, the interest rate on car loans and on such things as furniture can reach as high as 24 percent.

Although a loan on its face value may claim to charge up to 24 percent, lenders sometimes illegally charge more by sneaking in hidden fees.  A loan that charges more than the legal rate of interest is called usurious and is prohibited by law.  In many circumstances, the law considers fees, such as processing fees and financing fees, to be interest.  Below are some circumstances that are considered usurious and, therefore, illegal.

  • If a lender is charged compound interest and the sum of the interest exceeds a flat interest rate of 24 percent, that contract is usurious and prohibited by law. 
  • If there is an interest rate approaching 24 percent and the lender charges a processing fee or financing fee, the contract could be usurious.

If the requirements found in Md. Commercial Law Code Ann. §12-103 are not met, lenders can only charge 8 percent on the on the unpaid principal balance of a loan if there is a written agreement signed by the borrower which sets forth the stated rate of interest. However, if the loan is a written agreement secured by a certificate of deposit held by the borrower, the lender cannot charge an interest rate in excess of 2 percent of the interest rate payable on the certificate of deposit.

Generally, if the loan is secured by a mortgage or first deed of trust on any interest in residential real property, a lender can charge any interest rate, providing certain requirements are met.  Once again, these requirements can be found in Md. Commercial Law Code Ann. §12-103.  In addition, any interest rate can be charged on commercial loans in excess of $ 15,000 not secured by residential real property and on commercial loans in excess of $ 75,000 secured by residential real property.

If you have concerns about a contract, the rate of interest that you were charged, or on another legal matter, please contact the Law Office of Phillip E. Chalker at phillip@attorneychalker.com or (443) 961-7345.