How is compounded interest taken into account when determining whether a transaction violates the maximum allowable interest rate?

Obviously, the more frequently interest is compounded, the greater a lenders compensation will be for the use of its money. This is so because a borrower is obligated to pay interest on both the principal amount borrowed and on any interest compounded and added to the principal. Lewis v. Pacific States Sav. & Loan Co. (1934) 1 Cal.2d 691, 695, 37 P.2d 439, explained that compounded interest is taken into account

[254 Cal.Rptr.3d 647]

when determining whether a transaction violates the maximum annual interest allowed. Heald v. Friis-Hansen (1959) 52 Cal.2d 834, 840, 345 P.2d 457, confirmed that compounding the maximum allowable interest rate at intervals shorter than one year results in an effective annual rate that is usurious. These cases rest on the premise that compounded interest is part of the lenders compensation for the use of its money. Thus, the term "compensation" encompasses compound interest that effectively increases the lenders return.