Question

For this problem, assume that the legal rate of interest in New York is 16%. Jack lends Bobby $1,000 and Bobby signs a promissory note for $1,160 payable in one year. Explain whether the transaction is usurious and how much, if anything, the lender may recover.

Answer 1

An usurious transaction or contract is when any contact imposes a rate of interest on a debt in excess of what is permitted according to the law or the statute. Hence in an usurious contract the lender will receive more money as interest than what the law has permitted.

A legal rate of interest is the highest rate of interest a lender can charge on any type of debt. This prevents lenders from charging excessive interest rates from the borrowers.

In this case the legal rate of interest in New York is 16%. Bobby has signed a promissory note of $1160 including the interest amount for a borrowed amount of $1000 that is payable in one year. For $1000, 16% interest would be $160. Therefore the payable amount at the end of one year is $1160 (principle + interest) which Jack will receive. Therefore this is not a usurious transaction.