Interest Rate Factors and Usury Law
Interest rates in Washington State (including discount points, fees and other charges that could affect an overall rate) may vary a lot according to many factors:
- Market conditions
- Lender risk
- Type of lender
- Type of transaction
- Federal and state laws
"Usury" is the unlawful act of charging interest on a debt (including discount points, fees and other charges) at a rate greater than what is permitted under any applicable law or exemption from a law.
Washington State has a usury law (RCW 19.52) that sets limits on the maximum rate of interest a lender may charge a borrower. The usury law applies to consumer loans that are not related to a credit card debt, a retail installment contract or a consumer lease.
According to RCW 19.52.020(1), a lender may, if agreed in writing between the lender and borrower, charge an interest rate at a maximum rate of 12% per year. Or, a lender may charge 4% above the first auction quote on the Federal Reserve’s 26-week treasury bills made in the month preceding a written agreement between lender and borrower. A lender may use whichever rate is higher - 12% or 4% above the Federal Reserve rate on 26-week treasury bills.
For many years, the Federal Reserve rate on 26-week treasury bills has remained below 8%, so that Washington State’s maximum interest rate under the general usury law has effectively been 12%. If future economic conditions in the United States ever caused a radical shift in the government bond market so that the yield on treasury bills exceeded 8%, then the maximum interest rate permitted under RCW 19.52.020(1) would climb above 12%. This was certainly the case in the early 1980’s, when the yield on government bonds had soared so high that, for a brief time, interest rate on a consumer’s non-credit card and non-retail installment debt was permitted to legally exceed 21%!
Despite the general rule above, if no different rate is agreed to in writing, every loan shall have an interest rate of 12% per year unless the written agreement provides for either:
- Payment of money at the end of an agreed period of time (i.e., a “straight note” or “balloon note.”
- Payment of money where all principal and interest is due at the end or in installments over an agreed period of time (i.e., combined interest and principal are expressed together in a stated payment amount).
If a lender sues a borrower to collect on an unpaid loan (a consumer loan that is not exempt from the usury law), a borrower may consider using a defense of usury if the loan exceeded the maximum interest rate as stated above, and the borrower can prove that the loan was obtained and used primarily for personal, family or household purposes. See RCW 19.52.080.