Lenders that seek to recover compound monthly interest on loans for less than $250,000 are unenforceable and void
New York statutory law limits a lender’s ability to collect compound interest on any loan for $250,000 or less. Indeed, “compound interest” is commonly defined as interest on interest or interest that is paid on both the principal and the previously accumulated interest. “Compound interest” contrasts with “simple interest,” which is “paid on the principal only and not on accumulated interest” in that simple interest does not merge with principal and thus does not become part of the base for the computation of future interest. A promise to pay “interest upon interest” is void if made at a time before simple interest has accrued. In 1989, the legislature enacted the relevant statute, as a mean of public policy to prevent creditors from silently permitting debts to progressively mount at the expense of debtors who, often unaware of the consequences of such agreement, tend to confuse forbearance with indulgence. Please contact the New York trial attorneys at Bashian & Papantoniou for a consultation, if you have been sued under a loan agreement that seeks monthly compound interest on a loan for less than $250,000.