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Beware: A Loan Disguised as a Sale Can Be Deemed Unenforceable If You're Not Careful

In a recent case, a Florida court held that a loan disguised as a sale can be considered a usurious loan transaction if the vendor is obligated to repurchase the property at an amount which would generate a "profit" that would equal usurious interest. A usurious transaction is one which charges interest at a rate higher than the legal limit. If a transaction involves an intent to charge usurious interest, the result can be that the party charging the interest can lose all of the interest or, worse, if the interest exceeds 25% per annum (criminal usury), the entire "loan" including principal can be forfeited. While mere receipt of improper interest is not, necessarily improper, an intent to charge an unlawful interest would constitute an illegal transaction.

In the most recent Florida case, a vendor desired to borrow money. The "lender" lent the money through an agreement that essentially sold a parcel of real estate to the lender and required the vendor to repurchase the real estate at different time intervals at extraordinary profits (which would have resulted in usurious rates of interest had it been a loan). The Court confirmed that, if proven true, the entire transaction could be voided and the lender could lose its entire principal and interest.

Business people desiring to enter into unconventional loan transaction should beware of the consequences of these transactions. If it seems too good to be true, it probably is.