Usury
Charging interest in excess of the maximum rate authorized by law. Texas usury law applies to commercial and consumer loans. The Texas Constitution sets a 10% default ceiling; Texas Finance Code Chapter 303 authorizes optional rate ceilings that currently sit at the 18% statutory floor and may rise to 24% (28% for business-purpose credit) as market rates change. Penalties include three times the excess interest plus attorney's fees and, on a consumer loan where the creditor charges and receives more than twice the authorized interest, liability for the principal and all interest and other amounts charged and received.
Usury is the act of charging interest in excess of the maximum rate authorized by law. Texas usury law applies to both consumer and commercial loans. Texas usury law is rooted in the Texas Constitution and elaborated through the Texas Finance Code; violations expose the lender to civil penalties under Chapter 305, principally three times the excess interest plus attorney's fees.
Constitutional and statutory ceilings
Article XVI, Section 11 of the Texas Constitution sets two baseline rates: (1) absent legislation fixing maximum rates, a contract for more than 10% per year is usurious; (2) where no rate is agreed, the rate cannot exceed 6% per year. The Constitution gives the Legislature authority to define interest and fix maximum rates. The Legislature has done so through the Texas Finance Code, which establishes a series of category-specific ceilings substantially higher than 10%.
The 18% commercial loan ceiling
Section 303.003 computes the weekly ceiling as twice the 26-week Treasury bill auction rate, and § 303.009 sets an 18% floor and a 24% cap (28% for business-purpose credit). The computed rate has been below 18% for many years, so the weekly ceiling has stayed at the floor, making 18% the practical maximum for loans priced under the Chapter 303 weekly ceiling. The Texas Office of Consumer Credit Commissioner (OCCC) publishes the weekly ceiling in the Texas Credit Letter; lenders rely on the published rate to ensure compliance. The 18% ceiling generally applies absent specific statutory authorization for higher rates.
What counts as "interest"
Texas usury law defines "interest" broadly to capture amounts characterized as something else but functioning as compensation for the use of money. Key inclusions and exclusions: (1) included, stated interest; loan-origination fees that exceed reasonable cost; commitment fees that are unreasonable in relation to the credit extended; default rates and late charges that exceed reasonable limits; (2) excluded, bona fide third-party costs (title insurance, escrow fees, property taxes); time-price differentials in genuine credit sales; reasonable commitment and origination fees; equity options and profit participations in a qualified commercial loan (§ 306.101). The substance-over-form principle applies, courts look at the economic effect, not the labels.
Substance over form
Texas courts apply substance-over-form analysis to detect disguised loans: a transaction structured as a sale, investment, or partnership but functioning economically as a loan can be reclassified as a loan and tested against usury limits. Holley v. Watts, 629 S.W.2d 694 (Tex. 1982), states the elements of usury as a loan of money, an absolute obligation to repay the principal, and the exaction of greater compensation than the law allows, and applied them in a venue dispute over whether a deed and leaseback were in substance a loan. Indicators of a loan disguised as a sale: (1) repayment obligation absolute, not contingent; (2) seller's continuing operational control; (3) "buyer's" return is fixed rather than tied to underlying performance; (4) seller bears credit risk on the receivables; (5) recourse provisions favoring the "buyer."
Penalties for usury
Chapter 305 sets the penalties. On a commercial loan, the creditor is liable for three times the amount by which the interest contracted for or received exceeds the interest allowed by law. On a consumer loan, liability is the greater of three times that excess or the lesser of $2,000 or 20% of principal, and a creditor that charges and receives more than twice the lawful amount also forfeits the principal and all interest and other amounts charged and received. A creditor liable under § 305.001 also owes reasonable attorney's fees. Suit must be brought within four years. An obligor must give written notice at least 61 days before suing for penalties, and the creditor may correct the violation within 60 days after receiving that notice (§ 305.006). Separately, § 305.103 lets a creditor that discovers a violation itself avoid liability by correcting it within 60 days and notifying the obligor before the obligor gives notice or sues. Usury resulting from an accidental and bona fide error is not penalized (§ 305.101).
Savings clauses
Texas usury practice relies heavily on "usury savings clauses", contract provisions stating that any interest exceeding the legal maximum is automatically reduced to the legal maximum and any overage refunded. Savings clauses are generally enforceable but not unlimited, and their effect depends on the terms of the contract as a whole.
Out-of-state lender considerations
For a qualified transaction of $1 million or more, Tex. Bus. & Com. Code § 271.005 enforces a written choice of law if the transaction bears a reasonable relation to the chosen jurisdiction, even where that law is contrary to Texas public policy, subject to listed exceptions. Smaller transactions are analyzed under general Texas conflict-of-laws principles. Federal preemption under the National Bank Act, Federal Credit Union Act, and similar statutes may permit national banks and federally chartered institutions to "export" home-state rates to Texas borrowers; private lenders generally cannot.
For Texas commercial lenders, the 18% ceiling is rarely a binding constraint for traditional bank loans, where rates are usually below 18%. The ceiling becomes practical for: (1) mezzanine debt, all-in rates approach or exceed 18% with PIK and equity components; (2) hard-money real estate lending, short-term, high-rate loans against equity-heavy collateral; (3) merchant cash advances and factoring, although these often qualify as purchases rather than loans; (4) default-rate provisions, increased rates on default that, combined with regular interest, can exceed the ceiling.