In Texas, there isn’t a single law that sets a maximum interest rate; instead, various Texas laws govern interest rates depending on the type of financial transaction. Understanding these laws is crucial for both borrowers and lenders to ensure compliance and avoid severe penalties.
General Interest Rate Limits
The Texas Constitution, in Article 16, Section 11, states that contracts for an interest rate higher than 10% per year are considered usurious unless other legislation allows for a higher rate. If no interest rate is specified in a contract, the maximum rate is capped at 6% per year. This serves as the general rule for most loans and financial agreements within the state.
Specific Interest Rate Regulations
Texas Finance Code further outlines interest rate limitations in various financial situations:
- Chapter 302 reiterates the maximum interest rates from the Texas Constitution, generally capping interest at 10% per year unless specified otherwise.
- Chapter 303 allows for optional rate ceilings, with a cap of 18% per year under certain conditions.
- Chapters 342 and 345 discuss interest rates for consumer loans and retail installment sales, respectively.
- Chapter 346 governs revolving credit accounts, such as credit cards, with a maximum interest rate of 18% per year.
For motor vehicle sales, Texas Finance Code Section 348.103 places limits on the “time price differential” for installment sales, which essentially caps the interest that can be added to the principal balance in these transactions.
Payday and Title Loans
Despite the constitutional cap of 10% on interest rates, payday and title loan companies in Texas often charge much higher rates, sometimes exceeding 500%. These rates are made possible by the companies registering as Credit Services Organizations (CSOs) under the Credit Access Business (CAB) framework. By acting as brokers between borrowers and third-party lenders, these businesses can circumvent the usury protections in the Texas Constitution, leading to exorbitant fees and interest rates for borrowers.
Conclusion
Navigating the complexities of Texas usury laws requires a clear understanding of both state and federal regulations. Whether you are a borrower concerned about paying too much interest or a lender unsure of how much interest to charge, it is vital to consult with a qualified attorney to ensure compliance. Violations of these laws can result in significant legal and financial consequences.
Contributions to this blog by Joseph Ford.
