Lending money is a routine part of many business and real estate transactions. But in Texas, charging too much interest can expose a lender to serious legal consequences. The concept is known as usury, and it can transform what appears to be a profitable loan into a liability.
Understanding Texas usury law is important not only for lenders, but also for borrowers who suspect they may be paying unlawful interest.
What Is Usury?
Usury occurs when a lender contracts for, charges, or receives interest above the maximum amount allowed by law.
Texas law explicitly regulates interest rates. The statutory definition appears in the Texas Finance Code:
“Usurious interest” means interest that exceeds the applicable maximum amount allowed by law.
— Tex. Fin. Code § 301.002(a)(17)
Even if both parties voluntarily agree to a higher rate, the agreement can still be illegal if it exceeds statutory limits.
The Default Maximum Interest Rate in Texas
Unless another statute applies, Texas generally caps interest rates at 10% per year.
Texas law provides:
“The maximum rate of interest is 10 percent a year unless otherwise provided by law.”
— Tex. Fin. Code § 302.001(b)
However, many commercial transactions qualify for higher permissible rates under other provisions of the Texas Finance Code. These exceptions often apply to:
- Commercial loans
- Certain real estate transactions
- Credit cards and revolving credit
- Loans issued by licensed lenders
Because the rules vary, determining whether a rate is legal often requires reviewing the exact structure of the loan agreement.
What Counts as “Interest” Under Texas Law?
Another important aspect of Texas usury law is how interest is defined. Lenders sometimes attempt to label charges as “fees” rather than interest.
Texas law addresses this issue directly:
“Interest” means compensation for the use, forbearance, or detention of money.
— Tex. Fin. Code § 301.002(a)(4)
Courts often look beyond labels to determine whether a fee is actually disguised interest. Charges that may qualify as interest include:
- Origination fees
- Loan processing fees
- Excessive late charges
- Hidden financing charges
If these fees effectively increase the cost of borrowing beyond the legal limit, the loan may still be considered usurious.
Penalties for Charging Usurious Interest
Texas imposes significant penalties on lenders who violate usury laws.
Under Texas Finance Code § 305.001:
A person who contracts for, charges, or receives usurious interest is liable to the obligor for three times the amount of usurious interest.
The statute provides:
A creditor who violates usury laws may be liable for three times the amount of usurious interest contracted for, charged, or received.
— Tex. Fin. Code § 305.001(a)
In some cases, additional remedies may include:
- Recovery of attorney’s fees
- Cancellation of interest obligations
- Other statutory damages
Because of these penalties, lenders must be careful when drafting loan agreements.
Common Situations Where Usury Issues Arise
Usury disputes frequently appear in everyday legal matters, including:
Private Loans Between Individuals
Informal loans between friends, family members, or business partners may unintentionally violate Texas interest limits.
Owner Financing for Real Estate
Seller-financed real estate deals sometimes include interest terms that exceed legal limits.
Business Financing Agreements
Short-term commercial lending arrangements can accidentally structure fees that qualify as excessive interest.
Debt Restructuring Agreements
When unpaid debt is rolled into a new agreement with added interest or penalties, the effective interest rate may exceed legal limits.
When a Loan Is Not Considered Usurious
Texas courts recognize several situations where high interest rates may still be lawful. Examples include:
- Loans qualifying under commercial lending statutes
- Certain credit card or revolving credit arrangements
- Loans structured under statutes permitting variable interest ceilings
Because of these exceptions, determining whether a loan is truly usurious often requires reviewing the governing statute and the loan structure together.
Why Usury Law Still Matters
Usury laws may seem like a relic of older banking regulations, but they still play an important role in modern disputes.
For lenders, violating usury statutes can result in significant financial penalties and litigation risk.
For borrowers, identifying usury can sometimes provide a powerful defense against collection actions.
Because the rules depend heavily on how a loan is structured, careful drafting of loan agreements is essential.
Final Thoughts
Texas usury law illustrates an important principle of contract law: not every agreement the parties sign is enforceable. Even mutually agreed-upon interest rates must comply with statutory limits.
Whether you are drafting a loan agreement, entering an owner-financing transaction, or dealing with a disputed debt, understanding Texas interest laws can prevent costly mistakes.
At David C. Barsalou, Attorney at Law, PLLC, we help clients navigate business, family, tax, estate planning, and real estate matters ranging from document drafting to litigation with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call us at (713) 397-4678, email barsalou.law@gmail.com, or reach us through our Contact Page. We’re here to help you take the next step.
