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Interest and Usury

Interest is money paid for the use of money. Interest is payable where a contract to that effect exists whether expressed or implied, from circumstances, or the usages of trade, or the mode of the business dealings of the parties with one another. Interest, however, must be moderate, and it is regulated by statute in the various States of the Union.

Any excess over the legal rate of interest, whether directly or indirectly received, renders the contract void, and is punished as a misdemeanor in New York State by a fine not exceeding $1,000, or by imprisonment not exceeding six months, or both. Any amount of interest received in the excess of the legal rate can be recovered by legal process, provided the action be brought within one year from the time of payment.

Corporations are debarred from setting up the defence of usury. Should no interest be mentioned, in the case of promisory notes and bills of exchange, interest will not be allowed until the note or bill matures. After maturity, interest will be allowed, whether the fact be specified or omitted. In cases, however, where it has been agreed to pay a certain rate of interest up to maturity, and nothing is said as to the rate of interest afterward, there is a conflict in the decisions as to whether the agreed, or the legal rate shall be allowed. In most decisions, the agreed rate has been allowed.

By the common law interest on a judgment could not be included in the execution, but in most of the States it can now be included. As a rule compound interest is not allowed, except under special circumstances, or under the agreement between the parties; but a contract is not usurious, or rendered void, because of an agreement for the payment of compound interest. But compound interest is allowed against a trustee who has converted trust funds to his own use, or against an executor who may have negligently misused funds. But as against trustees, it must be shown that there is not merely neglect, but wilful breach of duty.

Should the agreement for the payment of compound interest be made before any interest has accrued, the courts will not enforce its payment. If a debt already due has an amount of unpaid interest, the parties may agree to add the principal and. interest, and let the aggregate draw interest.

Interest upon unpaid demands for board and lodging is not allowed, in cases where prices or time of payment has been agreed between the parties. A lender may charge a reasonable sum for his services, in addition to the interest, without becoming liable to the laws on usury. Interest in advance is allowable under certain conditions and limitations. To become liable for usury, there must be an intent to take more interest for the use of money than the law allows; so that a contract that would be usurious through a miscalculation of figures, or an error of fact would not be void. The contract also must be a lending and borrowing contract, for if it amounted to a sale, whether of lands, chattels or choses in action, it would not be usurious. Merchants who receive commissions in addition to the legal rate of interest are not liable for usury, nor does a provision for an attorney's fees, or, for the expenses of collection, invalidate the contract.