“‘Usury’ is generally defined as a premium or compensation paid or stipulated to be paid for the use of money borrowed at a greater rate of interest than is allowed by law.”i Usury laws prevent a lender from charging excessive interest rates on a loan. The primary purpose of usury laws is to prevent borrowers from paying exorbitant interest rates. However, in Virginia, certain business entities are not protected by usury laws when they default on loans with excessive interest rates.
Virginia Code section 6.2-308 prohibits the following entities from asserting usury as a defense to failure to pay the loan:
- partnerships that are required to file a certificate pursuant to the Virginia Revised Uniform Limited Partnership Act (or that were required to file a certificate pursuant the Act’s predecessors) or that are formed under laws other than those of the Commonwealth,
- limited liability companies,
- business trusts, or
- joint ventures organized for the purposes of holding, developing, and managing real estate for profit.
Virginia Code section 6.2-303, with a few exceptions, sets the maximum legal rate of interest at 12% per year. That limitation does not apply to the business entities identified above. In fact, Virginia Code 6.2-308 effectively implies that there is no cap on the interest rate that may be charged on loans to such entities. Furthermore, this cap on interest rates does not apply to guarantors and sureties assuring the payment of a business loan.ii This means that an individual who personally guarantees a business loan cannot claim usury as a defense. Courts have upheld interest rates that were as high as 18% per year.iii
Most boilerplate loan agreements have a standard clause which allows the lender to charge the “maximum interest allowed by law” under certain circumstances. Business borrowers should carefully review such clauses before signing and should consult a professional if there is any uncertainty as to the maximum rate.