Rate Cap

Definition - What does Rate Cap mean?

A rate cap is a maximum allowable percent that can be charged in terms of interest rate on any loan. The typical rate cap is between 23 -24%; any rate charged above this amount would be illegal and would not be collectible through the courts. A rate cap can be pre-determined for a set length of time or can fluctuate based on a link to the federal interest rate or rate that banks borrow at. All loans are subject to these regulations.

Justipedia explains Rate Cap

There are certain ways that lenders get past the rate cap. The main way is through applying compounded interest, but these are short term or payday loans. Most mortgage loans have either a fixed rate or a variable rate cap based on the rate that existed on the day the loan was agreed.

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