On May 23, the Supreme Court of Texas ruled that the maximum permissible interest on a loan must be calculated using the declining principal balance rather than the initial total principal amount. This decision was in response to a question posed to the 5th Circuit regarding a dispute over usurious interest charges. The appellate court emphasized the “actuarial method” must be used when calculating the interest rate of a commercial loan. In other words, interest amounts should be calculated for each payment period based on the declining principal balance.

The plaintiff, a credit card industry firm, argued the interest charged by the defendant lender exceeded legal limits when calculated using the actuarial method. The Texas Supreme Court’s interpretation of state usury laws supported the plaintiff’s position, clarifying that Texas law prohibits lenders from charging excessive interest on loans. A loan is not deemed “usurious” when the interest exceeds the maximum amount allowed by law (28 percent per year), but instead when the loan’s interest is “spread” over the contract’s entire term. This would allocate the total interest provided for a loan agreement over the full term of the loan.

This decision highlighted the importance of using the actuarial method, which requires interest calculations based on declining principal balances.