Which clause pushes the interest rate up to the highest rate allowed by law?

• A. Usury
• B. Late payment clause
• C. Escalation clause
• D. Defeasance clause

Answer: (C)

An escalation clause is designed to adjust the loan’s interest rate upward in response to changes in funding costs or risk, often tied to a benchmark or index. When those conditions rise, the clause allows the rate to climb, potentially all the way up to the legal maximum allowed by usury laws. This is why it’s the mechanism that can push the rate toward the highest permissible level, because it explicitly permits upward adjustments as conditions change, while still operating within legal limits.

The other ideas don’t serve this function: a usury-related clause would attempt to set a rate above the lawful cap (and is typically unenforceable); a late payment clause adds penalties for late payments but doesn’t automatically raise the rate toward the cap; and a defeasance clause changes how the loan is secured or repaid, not the interest rate.