Simple usury test
December 30, 2012 § 24 Comments
I’ve contended that usury is quite a bit simpler a subject than it is usually understood to be, and that preventing most of it as a practical matter would be rather straightforward. What I haven’t done though is give you a simple test to check to see if a given proposed lending contract is usurious. I intend to do that here.
In order to determine if a proposed contract is usurious, we need to ask the following:
- Is profitable interest charged on the loan?
- Has the borrower posted collateral providing security on the loan? (Note: a corporation or partnership counts as collateral).
- Is the lender’s recourse for recovery of principal and interest, in a case of default, limited to the named collateral and only the named collateral?
If all three of these are true, it is not usury. If (1) is true and either (2) or (3) are false, it is usury.