Interest rates, and how to figure them are one of those things you learned about in high school math class. Unlike trigonometry and advanced algebra, however, this is an area that it is important to understand and that you use in your everyday life. They are an essential part of understanding credit.
What is almost as important is understanding what the law has to saw about interest rates, and how they can be charged. The state and federal government has made some laws to help protect consumers against predatory lending. However, while it may have seemed tough to understand the math behind interest rates in school, that is nothing compared to understanding the law that governs them.
The legal maximum interest rate in Hawaii is 10%. This is a simple, rather than a compound, interest rate. This can include fees such as late fees, or annuals fees). Anything over this rate is illegal and is referred to as usury. There is also a limit set on the amount that can be lent of $250,000.
Many of your will now be sputtering objections at your computer screen. You credit card interest rate might be over this legal limit, or you might have a business loan or mortgage that that charges a rate greater than that 10%, particularly if you include fees. That is because, while the rate is often stated as a simple 10% cap, the situations in which it applies are fairly narrow.
The law specifically states that the cap applies to loans where there is no written contract. In this case, the legal interest rate is considered to be the Wall Street Journal prime rate for that quarter, but in any case no more than 10%. Also, this cap applies only to personal loans, but not business loans, which have their regulations.
What that really means is that if your buddy lends you some cash, and you agree to pay interest on it but don’t write out a contract, legally the law considers the interest rate to be that WSJ prime rate. The way the WSJ figures this rate is a little complicated. Essentially, it conducts a survey of the biggest banks to find out what the consensus rate is.
In addition to all that, in the ‘80s, the federal government also passed a set of laws that exempted certain financial institutions from having to adhere to the rate caps set by the states. Any bank, credit union, or credit card company is legally allowed to charge whatever rate they can get you to agree to.
The law considers American adults able to read contracts and make intelligent decisions about what they can afford and how much they should borrow. So, if you agree to an interest rate greater than 10% in a written contract, that is all on you. Understanding what you are signing is essential in any financial deal. Retaining a lawyer can be a really good investment if you’re not sure what the terms are.
Protected Under the Law
If you think you’re being charged a usurious (that is, an illegal) interest rate, you do have some recourse. You can take the lender to court, and make the case that the interest rate they are charging is unfair. If you win the case, you no longer have to pay the interest charged. Besides, you do not have to pay any court costs or fees.
You do have to pay the principal (the amount you originally borrowed), however. The lender can be fined a small amount, also. The penalties are small enough, however than many lenders are willing to chance an unfavorable court decision when calculating what interest rate to charge.
It may seem like this particular law does not do a great job of protecting consumers, and the rate cap does apply to a fairly narrow set of circumstances. There are some other laws that apply to lending and borrowing that might offer more help. The federal government, for example, has specific rules about what credit card companies are allowed to do
Laws surrounding interest rates are much more complicated than they first appear. It is always important to understand the terms under which you borrow money and to never borrow more than you can afford. There are always people out there willing to take advantage of the unwary, and a big interest rate can get you deep in debt fast.
However, there are ways to improve your situation. A lot of debts can be intimidating, but here are some laws that can be used for your benefit, and help get you out of a bad situation. A good lawyer can help you navigate these laws, and get your finances, and your life, back on track.