Loan contracts with very high interest: are they even legally binding?

Question

Say the borrower agreed to a loan contract of repaying $250 for a $200 in 10 days. Obviously, that is a very high annual interest rate, and illegal in many places. First of all, did the lender just commit a crime in signing that contract with the borrower?

Now, the borrower decides to not repay the loan, and this case gets brought to court. Would the court enforce this contract and say the borrower has to pay? Would the court ignore this because the interest rate is above the legal limit? Would the court even punish the lender for giving out a contract like this?

Answer 1

In canada, an effective annual rate that exceeds 60% is a criminal interest rate (Criminal Code, s. 347). A person who agrees to receive such interest is guilty of an offence. In british-columbia, credit products with more than 32% annual percentage rate of interest must be licensed and meet regulatory requirements.

Contracts that exceed these rates are not necessarily void. Instead, the Court may notionally sever the interest rate to the maximum allowable by law: Forjay Management Ltd. v. 625536 B.C. Ltd., 2020 BCCA 70, para. 59; Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, para. 6.

At one end of the spectrum are contracts so objectionable that their illegality will taint the entire contract. For example, exploitive loan-sharking arrangements and contracts that have a criminal object should be declared void ab initio. At the other end of the spectrum are contracts that, although they do contravene a statutory enactment, are otherwise unobjectionable. Contracts of this nature will often attract the application of the doctrine of severance.

Answer 2

It is over the legally allowed interest rate in Washington. It might be a crime, under the Criminal Profiteering Act, specifically extortionate extension of credit which is a felony. The requirement for conviction under that law is that the following must be true:

(a) The repayment of the extension of credit, or the performance of any promise given in consideration thereof, would be unenforceable at the time the extension of credit was made through civil judicial processes against the debtor in the county in which the debtor, if a natural person, resided or in every county in which the debtor, if other than a natural person, was incorporated or qualified to do business.

(b) The extension of credit was made at a rate of interest in excess of an annual rate of forty-five percent calculated according to the actuarial method of allocating payments made on a debt between principal and interest, pursuant to which a payment is applied first to the accumulated interest and the balance is applied to the unpaid principal.

(c) The creditor intended the debtor to believe that failure to comply with the terms of the extension of credit would be enforced by extortionate means.

(d) Upon the making of the extension of credit, the total of the extensions of credit by the creditor to the debtor then outstanding, including any unpaid interest or similar charges, exceeded one hundred dollars.

The contract is civilly unenforceable and the interest rate is above the criminal threshold, also the amount is more than $100. The uncertain part in your description is (c), whether the creditor intended you to believe that the agreement would be enforced by extortionate means, which is defined as

the use, or an express or implicit threat of use, of violence or other criminal means to cause harm to the person, reputation, or property of any person.

Threatening to sue a person is not an extortionate means, theft or knee-breaking is.

RCW 19.52.030 addresses what happens to such contracts in court. First, "the contract shall be usurious, but shall not, therefore, be void". Second,

the creditor shall only be entitled to the principal, less the amount of interest accruing thereon at the rate contracted for; and if interest shall have been paid, the creditor shall only be entitled to the principal less twice the amount of the interest paid, and less the amount of all accrued and unpaid interest; and the debtor shall be entitled to costs and reasonable attorneys' fees plus the amount by which the amount the debtor has paid under the contract exceeds the amount to which the creditor is entitled

So there is some financial penalty, but the debtor does not get to walk off with all of the creditor's money.

There does not appear to be any definitive Washington case law deciding whether "not void" mean "is enforceable", therefore since the contract is not void, it might not be "unenforceable".

Answer 3

Generally, there is no federal law that limits the interest rate that a credit card company can charge. (Consumer Finance Protection Bureau, Ask CFPB: Is there a law that limits credit card interest rates?, July 7th, 2017)

In its brief, the lawyers argue that two plaintiffs, Myra Brown and Alexander Taylor, were deprived of their “procedural rights” by the Biden administration because it didn’t allow the public to formally weigh in on the shape of its student loan forgiveness plan before it rolled it out. (Job Creators Network Foundation, Supreme Court Question 22-506 BIDEN V. NEBRASKA, February 21, 2023, https://www.supremecourt.gov/oral_arguments/calendars/MonthlyArgumentCalFebruary2023.html)

A certain industry payday loan may be implied by things like the context or degree to obligate the borrower in a interest-found estimate principal maximum royalty contract non-compounding payday loan. For example, Pipe.io FWIU orchestrates royalty contracts with a truncated payday, only estimated by some linear interest perhaps, but the bettor owns their appropriate risk.