Q: Is it legal for my friend and I to use our joint acct to charge 10% int on a 4 mth loan to friends that own business
My friend and I have friends with businesses that want to loan money from us at regular intervals. The minimum loan is $10,000 and maximum is $40,000. We are opening a joint bank account for the purpose of giving out loans to our friends and family. We want to charge 10% for a 4 month loan term and 20% for an 8 month loan term. We want to make sure we are compliant with state laws and guidelines, and will report any interest earned as income at the end of the year. Is this legal in the state of Maryland?
A: If the loan agreement is in writing, interest in a loan my not exceed 24% per year, and must comply with numerous other legal requirements in order to avoid the risk of violating the users laws. Owing 10% interest at the end of 4 months is an effective annual interest rate of 30%. Not only is the rate of interest illegal, the borrower can both refuse to pay it and sue you for four times the amount for violation of the users statute. The definition of interest in the statute includes many add-on fees, points, etc. If the loan agreement is not in writing, the maximum legal rate is 6% or 8% depending on certain other factors. If the loan is secured by bank deposits, real property, or other types of collateral, then other rules apply. The usery rate of interest is calculated on an annual simple rate basis (not compounded). Therefore, if your loan agreement is not in compliance with the law, and your borrowers discover this, your loan agreement will not be enforceable in the courts, and you will have no recourse to get repaid in the event of non-payment, and may be sued for damages allowed by law.
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