Somebody lends money to a business. The note carries 18%. A year later the borrower’s lawyer says the word usury, and everybody holds their breath.
Usually nothing happens. Once in a while something dramatic does. And the difference is almost never the rate. It’s the size of the loan, the purpose of the loan, and whether it was in writing.
Minnesota’s usury statute is old and short, and it’s built around exemptions that swallow most commercial lending. You want to know it cold, because when it does apply, the remedy isn’t a rate adjustment. It’s forfeiture.
What is the legal rate of interest in Minnesota?
Here’s Minn. Stat. § 334.01, subd. 1, still written in the currency of 1900:
The interest for any legal indebtedness shall be at the rate of $6 upon $100 for a year, unless a different rate is contracted for in writing. No person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater sum, or any greater value, for the loan or forbearance of money, goods, or things in action, than $8 on $100 for one year.
Two numbers, two different jobs:
- 6% is the default where the parties didn’t contract for a rate in writing.
- 8% is the ceiling where they did, unless an exemption applies. It usually does.
The same subdivision carries three rules that decide real cases:
- No compounding. “[I]nterest shall not be compounded, but any contract to pay interest, not usurious, upon interest overdue, shall not be construed to be usury.”
- Default-rate escalators are dangerous. “Contracts shall bear the same rate of interest after they become due as before, and any provision in any contract, note, or instrument providing for an increase of the rate of interest after maturity, or any increase therein after making and delivery, shall work a forfeiture of the entire interest.” That’s a rule about rate escalation on default, and escalators like that show up in a great many privately drafted notes, written by people who’ve never read it.
- Extensions get their own treatment. The escalator rule doesn’t reach notes bearing no interest before maturity, or agreements extending maturity that provide for an increased post-maturity rate. But “[a]ny agreement which extends maturity date of any contract, note or instrument shall not provide for an increased rate of interest in excess of $8 on $100 for one year.”
The exemption that does most of the work: $100,000
Minn. Stat. § 334.01, subd. 2 is the sentence that makes commercial lending in Minnesota possible:
Notwithstanding any law to the contrary, except as stated in section 58.137, and with respect to a conventional loan or contract for deed, section 47.20, subdivision 4a, no limitation on the rate or amount of interest, points, finance charges, fees, or other charges applies to a loan, mortgage, credit sale, or advance made under a written contract, signed by the debtor, for the extension of credit to the debtor in the amount of $100,000 or more, or any written extension and other written modification of the written contract. The written contract, written extension, and written modification are exempt from the other provisions of this chapter.
Read the conditions, because each one is a way to lose the exemption:
- $100,000 or more. A $95,000 note isn’t exempt under this subdivision.
- A written contract. An oral arrangement isn’t, no matter how big.
- Signed by the debtor. An unsigned term sheet isn’t a signed written contract.
- Extensions and modifications must also be written. A handshake extension of an exempt note is exactly how a clean deal turns into an argument.
Look at what the exemption covers. Not just the interest rate, but “points, finance charges, fees, or other charges.” And it exempts the transaction “from the other provisions of this chapter” and not merely from the rate cap.
The text names two carve-outs, and you should check both in any real-estate deal: § 58.137 and, for a conventional loan or contract for deed, § 47.20, subd. 4a.
Business and agricultural loans under $100,000: a floating cap
Between the 8% general cap and the $100,000 exemption sits Minn. Stat. § 334.011, subd. 1. It’s the provision people miss most often in small-business lending:
Notwithstanding the provisions of any law to the contrary a person may, in the case of a contract for the loan or forbearance of money, goods, or other things in action in an amount of less than $100,000 for business or agricultural purposes, charge interest at a rate of not more than 4-1/2 percent in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District encompassing Minnesota.
That’s a floating cap, not a fixed one. The permitted rate moves with the referenced federal discount rate, and you have to compute the ceiling as of the date the loan was made.
The subdivision defines its own terms. “Business” means “a commercial or industrial enterprise which is carried on for the purpose of active or passive investment or profit.” “Agricultural” gets a broad definition: production, harvest, marketing, transportation, processing, or manufacture of agricultural products, including horticultural, viticultural, and dairy products, livestock, poultry, forest products, fish and shellfish, “and any and all products raised or produced on farms.”
And there’s one hard limit: “No loan shall be made pursuant to this subdivision if the proceeds of the loan are used to finance the purchase or maintenance of real estate used principally for the borrower’s residence.”
Subdivision 3 is the lender’s friend. “If the rate of interest charged is permitted by this section at the time the loan was made, that rate of interest does not later become usurious because of a fluctuation in the federal discount rate.” Compute it once, get it right, at closing.
What happens when a loan is usurious
This is where usury stops being a technicality.
Under § 334.011, subd. 2 (business and agricultural loans):
If a greater rate of interest than that permitted by subdivision 1 is charged then the entire interest due on that note, bill or other evidence of debt is forfeited. If the greater rate of interest has been paid, the person who paid it may recover in a civil action an amount equal to twice the amount of interest paid.
All of the interest. Not the excess. All of it. And whoever paid it may recover double the interest already paid.
Under § 334.03, the general rule:
All bonds, bills, notes, mortgages, and all other contracts and securities … whereupon or whereby there shall be reserved, secured, or taken any greater sum or value for the loan or forbearance of any money, goods, or things in action than prescribed, except such instruments which are taken or received in accordance with and in reliance upon the provisions of any statute, shall be void except as to a holder in due course.
That same section has three qualifiers that regularly decide cases:
- Clerical error isn’t usury. “No merely clerical error in the computation of interest, made without intent to avoid the provisions of this chapter, shall constitute usury.”
- Monthly and advance computation is safe. “Interest at the rate of 1/12 of eight percent for every 30 days shall not be construed to exceed eight percent per annum,” and paying interest in advance for a year or less at a rate not exceeding eight percent isn’t usury.
- A holder in due course is protected. The original holder isn’t. “[W]here the original holder of a usurious note sells the same to an innocent purchaser, the maker thereof, or the maker’s representatives, may recover back from the original holder the amount of principal and interest paid on the note.”
Under § 334.02, recovering interest already paid, on a two-year clock:
Every person who for any such loan or forbearance shall have paid or delivered any greater sum or value than in section 334.01 allowed to be received may … recover in an action against the person who shall have received the same … the full amount of interest or premium so paid, with costs, if action is brought within two years after such payment or delivery.
Both § 334.02 and § 334.03 exclude regulated lenders. Neither applies “when the loan or forbearance is made by a lender and the lender is subject to section 47.59 or 48.196 or chapter 56,” and “lender” is defined to include state and federally chartered banks and savings institutions, credit unions, industrial loan and thrift companies under chapter 53, licensed lenders under chapter 56, and HUD- or VA-approved mortgagees. In Minnesota, usury is largely a private-lending problem, not a bank-lending one.
One narrow provision worth knowing: mission lending
Minn. Stat. § 334.011, subd. 5 opens a path for nonprofit business lenders. A 501(c)(3) organization that makes business-purpose loans “to individuals who are disadvantaged or otherwise unable to access standard sources of business credit,” paired with education, training, or counseling at no extra charge or at cost, may lend up to $10,000 at a rate not exceeding 16 percent per year, with an origination fee not exceeding two percent of principal.
The compliance conditions have teeth: written notice to the commissioner of commerce before you start, on a prescribed form, with a copy to the commissioner of employment and economic development, and an annual report to both.
The practical checklist
If you’re lending:
- Get to $100,000 if you legitimately can, in a written contract signed by the debtor. That one fact exempts the transaction from the chapter.
- If you’re under $100,000, confirm the purpose. Business or agricultural purposes get § 334.011’s floating cap. Consumer purposes don’t.
- Compute the § 334.011 ceiling as of the closing date and keep the math in the file. Subdivision 3 protects you after that.
- Never finance a borrower’s principal residence under § 334.011. The subdivision forbids it in so many words.
- Put every extension and modification in writing. An oral extension can cost you the exemption.
- Look hard at default-rate escalators. Under § 334.01, subd. 1, a provision raising the rate after maturity “shall work a forfeiture of the entire interest,” subject to the stated exceptions.
- Don’t dress up an interest charge as a “fee” to get around the cap. The statute reaches any greater sum taken “directly or indirectly … in money, goods, or things in action, or in any other way.”
If you’re borrowing, or defending a note:
- Start with the amount and the date. A written, signed extension of credit of $100,000 or more ends the inquiry under subd. 2.
- Then the purpose. Business or agricultural, under $100,000, points you to § 334.011 and its floating cap.
- Then who the lender is. A bank, credit union, chapter 53 or chapter 56 lender, or approved mortgagee is outside §§ 334.02 and 334.03.
- Then the arithmetic, including fees, points, and anything else taken for the loan or forbearance.
- Watch the two-year window in § 334.02 for getting back interest already paid.
Usury is rarely the whole case, and it’s often a very good counterclaim. It fits naturally with the questions that come up when the lender moves to collect: personal guaranty enforcement (see our personal guaranty guide) and whether a collateral disposition was commercially reasonable (see our Article 9 deficiency guide).
Who actually gets caught
Minnesota’s usury statute reads like a nineteenth-century relic because, mostly, it is one. Nobody in modern credit talks about “$8 on $100 for one year” anymore. The Legislature didn’t so much modernize the cap as build doors around it: a size exemption, a purpose exemption, a lender exemption.
So the doctrine almost never touches institutional lending, and it lands hardest on one crowd: private lenders papering their own notes. The friend financing a startup. The seller carrying paper on a business sale. The investor writing a bridge loan on a form he found online.
Those are the notes that get written at 18% for $60,000 on a handshake extension. And those are the notes where “the entire interest due … is forfeited” turns into a sentence somebody eventually reads out loud.
Madgett Law, LLC structures and documents private lending for Minnesota businesses and investors, and litigates usury, forfeiture, and enforcement disputes on privately held notes. If you’re about to lend, the exemption analysis belongs in the paperwork, not the lawsuit. Send us a message or call 612-470-6529.
Sources: Minn. Stat. § 334.01 (rate of interest — subd. 1, the $6 default and $8 ceiling per $100 per year, the no-compounding rule, the post-maturity escalation forfeiture, and the limit on extension agreements; subd. 2, the exemption for written contracts signed by the debtor extending credit of $100,000 or more, and the § 58.137 and § 47.20, subd. 4a carve-outs; subd. 3, ERISA plan loans); Minn. Stat. § 334.011 (business and agricultural loans — subd. 1, the floating cap of 4-1/2 percent over the 90-day commercial paper discount rate at the Federal Reserve Bank in the district encompassing Minnesota, the statutory definitions of “business” and “agricultural,” and the prohibition on financing the borrower’s principal residence; subd. 2, forfeiture of the entire interest and recovery of twice the interest paid; subd. 3, no later usury from federal discount rate fluctuation; subd. 5, charitable organization loans up to $10,000 at up to 16 percent with a two percent origination fee, and the notice and annual reporting conditions); Minn. Stat. § 334.02 (recovery of usurious interest within two years; exclusion of lenders subject to § 47.59, § 48.196, or chapter 56); Minn. Stat. § 334.03 (usurious contracts void except as to a holder in due course; clerical error; the 1/12-of-eight-percent and advance-payment computations; recovery from the original holder; the same lender exclusion) (Minnesota Office of the Revisor of Statutes). The permitted rate under § 334.011 floats and must be computed against the referenced federal rate in effect when the loan is made. This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. No outcome is promised or implied.