What interest can be charged under an Alabama contract, and what happens if it is too high?
The general cap is low, it yields to any other rate the law allows, and the exemption is wide. Except as otherwise provided by law, the maximum rate of interest upon the loan or forbearance of money, goods, or things in action, except by written contract, is $6 upon $100 for one year, and the rate by written contract is not to exceed $8 upon $100 for one year, and at that rate for a greater or lesser sum or a longer or shorter time (Ala. Code § 8-8-1). But any person, corporation, trust, general or limited partnership, or association may agree to pay whatever rate it determines for the loan or forbearance of money and for any credit sales, notwithstanding any law of the state otherwise limiting the rate, provided the ORIGINAL PRINCIPAL BALANCE is not less than $2,000, and provided that all laws relating to unconscionability in consumer transactions, including the Mini-Code in Chapter 19 of Title 5, still apply (§ 8-8-5(a)); as to such a loan, neither the borrower nor any surety, guarantor or endorser may raise or claim the defence or benefit of the usury laws (§ 8-8-5(b)), and the section does not apply where the original principal balance is less than $2,000 (§ 8-8-5(d)). Where the cap does bite, all contracts for interest at a higher rate than the chapter prescribes are usurious and cannot be enforced except as to the principal; the borrower cannot be required to pay more than the principal sum borrowed, and interest already paid must be deducted from the principal, with judgment entered for the balance only, though usury may not be pleaded against a holder in due course of a negotiable instrument (§ 8-8-12). Individuals, partnerships, banks, corporations and other legal entities may also charge the same rate or finance charge, to the same extent and under the same circumstances and conditions, as any federal or state chartered or licensed lending institution with its principal place of business in Alabama, provided that an individual or partnership that charges more than such a lending institution is permitted to charge under other applicable law is subject to the same penalties that other law prescribes for excessive interest or finance charges (§ 8-8-1.1(a)). That section is cumulative and diminishes no existing right, and its amendment is retroactive to May 14, 1979 except that it changed no interest rate on a secured loan in existence as of April 25, 1980 (§ 8-8-1.1(b)).
The trap
The $2,000 line, not the 8 percent figure, is what decides almost every commercial question: at or above a $2,000 original principal balance the parties may agree any rate and the usury defence is gone for the borrower AND for sureties, guarantors and endorsers. "Original principal balance" is defined to include the total principal incurred or contracted for, without regard to the amount of any initial or later advance, and "interest" there includes all direct or indirect charges imposed as an incident to the loan, forbearance or credit sale (§ 8-8-5(c)). Below $2,000 the penalty is severe and one-directional: the lender loses all interest, and interest already paid comes off the principal. Unconscionability law and the Mini-Code survive the exemption by its own terms.
6 authorities
- statuteAla. Code § 8-8-1enactment date not established
The words that state the rule
Except as otherwise provided by law, the maximum rate of interest upon the loan or forbearance of money, goods, or things in action, except by written contract is $6 upon $100 for one year, and the rate of interest by written contract is not to exceed $8 upon $100 for one year and at that rate for a greater or less sum or for a longer or shorter time.
- statuteAla. Code § 8-8-5enactment date not established
The words that state the rule
(a) Any person or persons, corporations, trust, general partnership or partnerships, limited partnership or partnerships, or association may agree to pay such rate or rates of interest for the loan or forbearance of money and for any credit sales as such person, corporation, trust, general partnership, limited partnership, or association may determine, notwithstanding any law of this state otherwise prescribing or limiting such rate or rates of interest; provided, that the original principal balance of the loan or forbearance of money or credit sales is not less than $2,000; provided further, that all laws relating to unconscionability in consumer transactions including but not limited to the provisions of Chapter 19 of Title 5, known as the Mini-Code, shall apply to transactions covered by this section. (b) As to any such loan or forbearance of money or credit sales made in compliance with subsection (a) of this section, neither such person, corporation, trust, general partnership, limited partnership, or association, nor their heirs, successors, or assigns, nor any surety, guarantor, endorser, or any other person, firm, partnership, association, trust, or corporation which may become liable, in whole or in part, for the payment of the debt and interest agreed to be paid thereon in accordance with the terms hereof, or any extension, amendment, or renewal thereof, may raise or claim the defense or benefit of the usury laws or any other law prescribing, regulating, or limiting such rate or rates of interest.
- statuteAla. Code § 8-8-5enactment date not established
The words that state the rule
(c) The term “original principal balance,” as used herein, shall include the total principal amount of indebtedness incurred or contracted for in a loan, forbearance of money, credit sales, or in a single issue or sale of bonds, debentures, promissory notes, or like transaction, without regard either to the face amount or denomination of any bond, debenture, note, or other evidence of indebtedness constituting a part of such issue or sale, or to the amount of the initial or any subsequent advance pursuant to such loan, forbearance, or credit sales. The term “interest” as used herein shall include all direct or indirect charges imposed as an incident to a loan, forbearance of money, or credit sales. (d) This section shall apply to any person or entity, whether or not organized for profit, and to transactions both prior to and after default, but shall not apply to any agreement involving the loan or forbearance of money or credit sales where the original principal balance is less than $2,000.
- statuteAla. Code § 8-8-12enactment date not established
The words that state the rule
(a) Except as otherwise permitted by law, all contracts for the payment of interest upon the loan or forbearance of goods, money, things in action, or upon any contract whatever at a higher rate than is prescribed in this chapter are usurious and cannot be enforced except as to the principal. (b) The borrower of money at a usurious rate of interest shall not in any case be required to pay more than the principal sum borrowed, and if any interest has been paid, the same must be deducted from the principal and judgment entered for the balance only; provided, however, that the defense of usury may not be pleaded against a holder in due course of any negotiable instrument.
- statuteAla. Code § 8-8-1.1enactment date not established
The words that state the rule
(a) Individuals, partnerships, banks, corporations, and other legal entities may, on any loans or extensions of credit made by them, charge or impose the same rate of interest or finance charge to the same extent and under the same circumstances and conditions as any federal or state chartered or licensed lending institution having its principal place of business in Alabama; provided, however, that any individual or partnership charging or imposing interest or finance charges in excess of that permitted such lending institutions under other applicable law shall be subject to the same penalties prescribed in such other applicable law or laws for such excessive interest or finance charges.
- statuteAla. Code § 8-8-1.1enactment date not established
The words that state the rule
(b) The provisions of this section are cumulative and nothing herein contained shall diminish rights or powers otherwise existing. The provisions of this section, as amended, shall have retroactive effect to May 14, 1979, when it became law; provided, however, that there shall be no change of interest rates on secured loans in existence as of April 25, 1980. Any actions taken or contracts made in accordance with the provisions of this section since May 14, 1979 are hereby ratified, validated, and confirmed.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.