By Marian L. Faupel
FAUPEL, FRASER & FESSLER
Ann Arbor, MI
2010
People borrow money all the time. Sometimes they do it with a credit card. Sometimes it's a conventional loan from the bank. More often, however, it is a short term loan from a friend or family member. Since this is a deal between people who know each other well, and there is no formal institution involved, folks often believe that they can just negotiate an interest rate between themselves.
That is not so in Michigan. Michigan has a "usury" law that limits interest rates to 5% if the loan is just verbal, and there is no written promissory note or "IOU." If the loan is in writing, then the rate can be 7%. This obviously interferes with the situation that often arises where a father is investing his money at 5%, and the son discovers that an auto loan will cost him 10%. The son may approach his father and propose that the father lend him the money for the car at 8%, which will give the father an enhanced return on his savings and save the son 2% on the auto loan. You can't do this in Michigan.
There are three exceptions to this law. First, some lenders are considered "regulated" lenders, such as banks and credit card companies. Special rules apply to them. There is a second exception for loans that are given for a business purpose. If the borrower signs an affidavit that the loan is for a business purpose, then he may agree to any interest rate that is not unlawful. MCLA 438.61. Business loans to individuals used to be limited to 15%, but they may now have interest rates of up to 25%. Corporations have always been able to borrow at rates of up to 25%. MCLA 450.1275.
In Michigan charging over 25% simple interest is considered a felony in Michigan under MCLA 438.41. This can result in five (5) years in prison and a $10,000 fine. Violating the civil statutes regarding interest rates can be just as disastrous. If a lender charges an interest rate that exceeds 7% for a loan that is in writing, and if the loan has not yet been fully paid off, then the court can convert the interest rate to zero (yes, zero); recalculate all the payments so that everything paid to date is considered a payment on principal; and award the borrower (yes, the borrower) all of his/her attorney fees if there is litigation (and even if the borrower was in default when the litigation commenced). Years ago in Michigan, when there was massive litigation involved predatory mortgage lending, some borrowers were able to prevail on a usury defense. In the end, after all of their payments were treated as payments on principal, some of them discovered that their houses had been paid off after 10-15 years into a 30 year mortgage.
If you are going to lend or borrow money, it is important to stay within these guidelines or consult an attorney before parting with the money.
