Texas Usury Laws and Owner-Financed Notes: Maximum Interest Rates

Texas promissory note holders who want to convert their future payments into a lump sum of cash can sell their note to a direct buyer and close in as little as two to four weeks. The process is straightforward: submit your note details, receive a cash offer within 24 hours, and close on your timeline. Longhorn Note Buyers in San Antonio, a direct buyer with over four decades of experience and more than $47 million in Texas notes purchased, offers free valuations within 24 hours and closes with no broker commissions.

This guide covers what Texas promissory note holders need to know about this topic, including the key factors that affect your options and how to get the best possible outcome.

The Basics of Texas Usury Law

Usury, in its simplest definition, is the practice of charging interest on a loan at a rate that exceeds the legal maximum. Texas has prohibited usury since before it was a state — the Republic of Texas included usury provisions in its laws, and the tradition continues through multiple chapters of the modern Texas Finance Code.

The Default Maximum Rate: 10%

Under Texas Finance Code Chapter 302 (the Texas Credit Title), the default maximum interest rate for a written agreement is 10% per year. This means that if no other statute authorizes a higher rate, the most you can charge on a promissory note in Texas is 10% annual interest. This default rate applies to most basic promissory notes that do not fall under a specific statutory exception.

However — and this is where it gets interesting — Texas law provides numerous exceptions and alternative rate ceilings that can authorize interest rates well above 10%. The applicable ceiling depends on the type of loan, the type of borrower, the amount of the loan, and which chapter of the Finance Code governs the transaction.

The Indicated Rate Ceiling: 18%

Texas Finance Code Section 303.009 establishes an "indicated rate ceiling" of 18% per year for most commercial and non-consumer transactions. This means that for many owner-financed notes — particularly those involving commercial property, vacant land, or transactions between businesses — the maximum allowable interest rate is 18%, not 10%. The indicated rate ceiling applies unless a different ceiling is established by another statute or by a published rate calculation.

Variable Rate Ceilings

In addition to the fixed ceilings, Texas law establishes variable rate ceilings that are calculated based on prevailing market conditions. Texas Finance Code Section 303.008 defines several "weekly ceiling" rates that fluctuate based on the auction rate of 26-week U.S. Treasury bills. These variable ceilings can sometimes exceed 18%, providing additional headroom for lenders in high-interest-rate environments. However, for most owner-financed transactions in Texas, the practical ceiling is either 10% or 18% depending on the transaction type.

Which Usury Ceiling Applies to Your Owner-Financed Note?

Determining which usury ceiling applies to your specific note requires analyzing the nature of the transaction. Here are the most common scenarios for Texas note holders.

Residential Property (Consumer Purpose Loan)

If you seller-financed a house to an individual who is buying it as their primary residence, the transaction is likely classified as a consumer-purpose loan. Consumer loans in Texas are subject to additional protections under the Texas Finance Code, and the applicable interest rate ceiling depends on the specific statutory framework governing the loan. For most basic seller-financed residential transactions, the 10% default ceiling applies unless the transaction qualifies under a specific chapter that authorizes a higher rate.

Some seller-financed residential notes are originated under Texas Finance Code Chapter 159 or other provisions that may authorize rates above 10%. The specific rate ceiling depends on factors such as whether the loan amount exceeds certain thresholds and whether the transaction involves a licensed mortgage originator. This is one area where the intersection of usury law and Dodd-Frank regulations can create complexity. If you are unsure which ceiling applies to your residential note, consulting a Texas real estate attorney is the safest course of action.

Vacant Land and Agricultural Property

Notes secured by vacant land, agricultural land, or ranch property are generally not considered consumer-purpose loans (unless the land includes a dwelling that the borrower occupies as a residence). For these transactions, the 18% indicated rate ceiling under Section 303.009 typically applies. This is why many owner-financed land transactions in Texas carry interest rates in the 8% to 14% range — well below the ceiling but higher than the 10% default that would apply to consumer transactions.

The higher ceiling for land transactions gives Texas sellers more flexibility in structuring their notes. However, just because you can charge 18% does not mean you should. The interest rate affects the note's value on the secondary market — notes with extremely high interest rates may actually receive lower offers because the high rate increases the risk that the borrower will default or attempt to refinance. Our article on how note buyers calculate their offer explains how interest rate factors into pricing.

Commercial Property

Notes secured by commercial property (retail, office, industrial, or multifamily with five or more units) are generally subject to the 18% indicated rate ceiling. Commercial transactions between businesses may also qualify for additional exemptions under the Texas Finance Code that effectively eliminate or increase the usury ceiling. If both parties to the transaction are businesses (for example, an LLC selling to another LLC), certain provisions of the Texas Finance Code may authorize even higher rates, though rates above 18% are uncommon in the owner-financing context.

Contracts for Deed (Executory Contracts)

If your transaction is structured as a contract for deed rather than a note and deed of trust, the Texas Property Code Chapter 5 imposes additional requirements and restrictions. While Chapter 5 does not establish its own interest rate ceiling, the general usury laws still apply to contracts for deed. Additionally, Chapter 5 requires specific disclosures and protections for the buyer, and failure to comply with these requirements can give the buyer grounds to cancel the contract. Our article on Texas Property Code Chapter 5 and contracts for deed covers these obligations in detail.

Penalties for Usury Violations in Texas

Texas takes usury violations seriously, and the penalties can be severe. Understanding the consequences helps explain why note buyers pay close attention to the interest rate on any note they consider purchasing.

Forfeiture of Interest

Under Texas Finance Code Section 305.001, a creditor who charges a usurious rate of interest forfeits twice the amount of interest contracted for (not just the excess amount). This means that if you charged $50,000 in total interest over the life of a note and the rate was usurious, you could be required to forfeit $100,000 — the full amount of interest times two. This penalty is automatic and does not require the borrower to show actual damages.

Forfeiture of Principal

In cases where the usurious interest rate exceeds twice the authorized ceiling, the creditor faces an even harsher penalty: forfeiture of all principal and interest. Under Texas Finance Code Section 305.001(b), if you charge interest at a rate that is more than double the maximum authorized rate, you lose the right to collect not just the interest but the entire principal balance. This is the "nuclear option" of Texas usury penalties and illustrates why getting the rate right is so critical.

Spreading and Curing Provisions

Texas law does provide some relief for lenders who inadvertently charge usurious rates. The "spreading" doctrine allows interest to be spread over the full term of the loan, which may reduce the effective rate below the usury ceiling. Additionally, Texas Finance Code Section 305.103 allows a creditor to "cure" a usury violation by refunding the excess interest to the borrower within 60 days of the date the creditor discovers or should have discovered the overcharge. These provisions offer important protection for honest mistakes but do not apply to intentional overcharges.

How Usury Compliance Affects the Value of Your Note

When you sell your promissory note to a buyer like Longhorn Note Buyers, the buyer will evaluate the interest rate on your note as part of their due diligence. Usury compliance affects your note's value in several ways.

A Compliant Rate Supports a Higher Offer

A note with an interest rate that is clearly within the applicable usury ceiling is one less risk for the buyer to worry about. This translates into a cleaner transaction and a stronger offer. Notes with interest rates in the typical market range for their property type — say 6% to 10% for residential notes, or 8% to 12% for land notes — are generally viewed favorably by buyers.

A Borderline Rate Creates Uncertainty

If the interest rate on your note is close to the usury ceiling, the buyer needs to confirm exactly which ceiling applies. This analysis can be complex, involving the type of property, the type of borrower, the loan amount, and the applicable chapter of the Finance Code. Uncertainty slows down the due diligence process and may result in a slight discount to account for the risk. If you are unsure whether your rate is within the legal limit, getting a legal opinion before approaching buyers can streamline the process.

A Usurious Rate Is a Serious Problem

If the interest rate on your note exceeds the applicable usury ceiling, you have a significant problem. The penalties described above — forfeiture of interest or even principal — represent a direct threat to the note's enforceability. Note buyers will either decline to purchase a usurious note or will offer a steep discount to account for the legal risk. If you suspect your note's rate may be usurious, consult a Texas attorney immediately to explore your options, including the possibility of curing the violation by refunding excess interest to the borrower.

Interest Rates and the Secondary Note Market

Beyond usury compliance, the interest rate on your note affects its value on the secondary market in ways that are not always intuitive.

Higher Interest Rates Generally Mean Higher Offers — Up to a Point

Note buyers earn their return on investment from the interest income and the discount at which they purchase the note. A higher interest rate means more income per dollar invested, which generally makes the note more attractive. All else being equal, a note at 9% will receive a higher offer (smaller discount) than an identical note at 6%.

But Very High Rates Increase Default Risk

There is a counterintuitive twist: when the interest rate gets too high, the risk of borrower default increases. A borrower paying 14% or 15% interest is more likely to seek refinancing, to fall behind on payments, or to default entirely. This increased default risk can offset the benefit of the higher interest rate, resulting in a larger discount. The sweet spot for most Texas owner-financed notes — the range where the interest rate maximizes note value on the secondary market — is generally between 7% and 12%, depending on the property type and current market conditions.

Our article on owner financing interest rates for Texas land provides current market data on typical rates, and our note pricing scenarios with discount rate examples shows how different interest rates affect the offers you can expect.

Common Usury Questions From Texas Note Holders

Does the Interest Rate Include Fees and Points?

Under Texas usury law, certain fees and charges are treated as "interest" for purposes of the usury analysis. If you charged the borrower origination fees, points, document preparation fees, or other upfront charges in addition to the stated interest rate, those charges may need to be included in the effective interest rate calculation. If the stated interest rate plus these additional charges exceeds the usury ceiling, the loan could be considered usurious. This is another area where consulting an attorney before originating a note can prevent problems down the road.

Can the Interest Rate Change Over the Life of the Note?

Some Texas owner-financed notes include adjustable rate provisions — the interest rate changes at specified intervals based on an index or formula. Adjustable rate notes are legal in Texas, but the rate cannot exceed the usury ceiling at any point during the life of the loan. If market rates rise and an adjustable rate formula would push the rate above the ceiling, the rate must be capped at the maximum legal amount. Our article on selling a note with an adjustable rate covers how these notes are valued on the secondary market.

What About Default Interest Rates?

Some Texas promissory notes include a "default interest rate" — a higher rate that kicks in if the borrower falls behind on payments. Default interest provisions are legal in Texas as long as the default rate does not exceed the applicable usury ceiling. A note that charges 8% interest normally but increases to 12% upon default is fine if 12% is within the legal limit. But a note that jumps from 8% to 24% upon default could be usurious, depending on the applicable ceiling for that transaction.

Default interest provisions also affect the note's attractiveness on the secondary market. Note buyers view default interest as a mixed signal — it provides additional compensation for the risk of a defaulting borrower, but it also increases the likelihood that a defaulting borrower will contest the note's terms. Our article on whether your promissory note is legally enforceable discusses how various note provisions, including default interest, affect enforceability.

What About Late Fees?

Late fees are generally not treated as interest for usury purposes under Texas law, provided they are reasonable and structured as a flat charge or a reasonable percentage of the overdue payment (typically 4% to 5% of the payment amount). However, if late fees are structured in a way that effectively functions as additional interest, they could be challenged. The safest approach is to include a reasonable late fee provision (such as 5% of the overdue payment after a 10-day or 15-day grace period) and to document it clearly in the promissory note.

Protect Your Note's Value: Get the Interest Rate Right

If you are about to originate an owner-financed note in Texas, take the time to determine the correct usury ceiling for your transaction and set the interest rate well within that limit. If you already hold a note and are considering selling it, verify that the interest rate is compliant before approaching buyers. And if you discover a potential usury issue, consult a Texas attorney to explore your options.

Longhorn Note Buyers has purchased over $47 million in Texas notes since 2007 — and our founder Nick McFadin has been buying notes since 1983, giving us over 42 years of experience navigating Texas note law. We have seen every interest rate scenario, every usury question, and every compliance challenge. We provide honest, transparent evaluations and a firm offer within 24 hours. Our 100% close rate and A+ BBB rating reflect our commitment to treating every note seller fairly.

Ready to find out what your note is worth? Call Sandy McFadin at (210) 828-3573 or email sandy@longhornnotebuyers.com. The call is free, the offer is firm, and we close what we quote.

Frequently Asked Questions

What is the maximum interest rate I can charge on an owner-financed note in Texas?

The maximum rate depends on the type of transaction. The default ceiling for a written agreement is 10% per year under Texas Finance Code Chapter 302. For many non-consumer transactions — including most vacant land and commercial property notes — the indicated rate ceiling is 18% under Section 303.009. Variable rate ceilings tied to Treasury bill rates may authorize even higher rates in some circumstances. The applicable ceiling for your specific note depends on the property type, loan amount, and borrower classification.

What happens if I accidentally charged a usurious interest rate?

If you discover that you inadvertently charged a usurious rate, Texas Finance Code Section 305.103 allows you to cure the violation by refunding the excess interest to the borrower within 60 days of discovering (or when you should have discovered) the overcharge. If you cure the violation in time, the penalties for usury are avoided. If you do not cure, you may face forfeiture of twice the contracted interest amount, and if the rate exceeds twice the authorized ceiling, forfeiture of all principal and interest.

Does the usury limit apply to late fees on my Texas note?

Late fees are generally not considered interest for usury purposes under Texas law, provided they are structured as reasonable charges for late payment (typically a flat fee or a percentage of the overdue payment, such as 4% to 5%). However, if late fees are structured in a way that functions as disguised interest — for example, excessive fees that significantly increase the effective cost of borrowing — they could be challenged as usurious. A reasonable late fee with a clear grace period is the safest approach.

Can I sell a note with a high interest rate in Texas?

Yes, provided the interest rate does not exceed the applicable usury ceiling. Notes with interest rates in the 8% to 12% range are common in the Texas secondary market and are readily purchased by note buyers. Notes with rates above 12% are still sellable but may face additional scrutiny because higher rates increase the risk of borrower default or refinancing. The key is that the rate must be legal — a usurious rate creates serious enforceability problems that will significantly reduce the note's value.

Do Texas usury laws apply to notes created before the current laws were enacted?

Texas usury law applies to the note as of the date it was created. If the interest rate was legal at the time of origination under the laws then in effect, changes in the usury statutes generally do not retroactively make the note usurious. However, if a note is modified or renewed, the modified terms must comply with the usury laws in effect at the time of modification. If you hold an older note and are unsure about its compliance, consulting a Texas attorney who specializes in finance law is advisable.