Alabama Loan Agreement

Introduction

Key Things to Know

1. 1

   In Alabama a loan agreement puts a lender's advance and a borrower's promise to repay in writing, recording the amount, the rate, and the payment dates; a loan of 2,000 dollars or more may set any rate the parties put in writing, while smaller loans stay under the 8 percent ceiling.

2. 2

   Alabama sets a general 8 percent cap on a small private loan. Under Alabama Code Section 8-8-1 the maximum legal rate by written contract is 8 percent per year unless another law allows more. In practice this ceiling binds loans of less than 2,000 dollars.

3. 3

   A loan of 2,000 dollars or more may carry any rate the parties agree to in writing. Alabama Code Section 8-8-5 lets the parties to a loan of 2,000 dollars or more agree to any rate and waives the usury defense, so the 8 percent cap does not apply once the loan reaches that size.

4. 4

   If a written loan agreement does not state a rate, Alabama law fills the gap at 8 percent per year (Alabama Code Section 8-8-1). Always write the agreed rate into the agreement so this default rate does not apply by accident.

5. 5

   You do not need a license to make an occasional private loan. An Alabama Small Loan Act license is required only of a person engaged in the business of lending amounts under 1,500 dollars at a higher charge (Alabama Code Section 5-18-4), supervised by the State Banking Department.

6. 6

   Put the loan in writing and keep a late fee reasonable. A written, signed agreement is far easier to enforce, and any late charge should be a reasonable estimate of the lender's actual costs from a late payment rather than an arbitrary penalty.

7. 7

   Spell out default and acceleration, and mind the deadline to sue. Define what counts as default, include an acceleration clause so the lender can demand the whole unpaid balance at once, and remember a lawsuit on a written contract must be filed within six years (Alabama Code Section 6-2-34).

Alabama Requirements for Loan Agreement

• Maximum Interest Rate (Usury Cap)

  Alabama sets a general maximum legal rate of 8 percent per year by written contract under Alabama Code Section 8-8-1. In practice this cap binds a loan of less than 2,000 dollars. State the rate as a number and keep a small private loan at or below 8 percent unless you are an exempt or licensed lender.

• Loans of 2,000 Dollars or More

  A loan or forbearance of 2,000 dollars or more may carry any rate of interest the parties agree to in writing, and the usury defense does not apply to it (Alabama Code Section 8-8-5). This size threshold is the key Alabama rule: below 2,000 dollars the 8 percent cap applies, at or above it the parties are free to set the rate in writing.

• Legal Rate When the Contract Is Silent

  If a written loan agreement does not state an interest rate, Alabama law fixes the legal rate at 8 percent per year (Alabama Code Section 8-8-1). Always write the agreed rate into the agreement so the 8 percent default does not apply by accident, and remember that a loan of 2,000 dollars or more still needs its higher rate stated in writing to be enforceable.

• Lender Licensing (Alabama Small Loan Act)

  An Alabama Small Loan Act license from the State Banking Department is required only of a person who engages in the business of lending amounts of less than 1,500 dollars at a greater charge than otherwise allowed (Alabama Code Section 5-18-4). An individual making an occasional private loan is not in the business of lending and generally does not need a license. If you lend money repeatedly as a business, confirm whether you must be licensed before you lend.

• Put the Loan in Writing

  A loan need not be written to be enforceable in Alabama, but writing it down is strongly advised. A written agreement is what lets you set the agreed rate, including any higher rate on a loan of 2,000 dollars or more (Alabama Code Section 8-8-5), and it carries a six-year period to sue (Alabama Code Section 6-2-34). Have both parties sign and date the agreement and keep a copy.

• Late Fees Must Be Reasonable

  Alabama does not set a flat statutory late-fee cap for a private written loan. A late charge is enforceable as a reasonable estimate of the lender's actual costs from a late payment, not as a penalty. Set any late fee in an Alabama loan agreement as a reasonable amount tied to your real costs, and keep total charges within the applicable interest limit on a loan of less than 2,000 dollars.

• Default and Acceleration

  Define default clearly, usually a payment missed past a stated grace period, a broken promise in the agreement, or the borrower insolvency. Include an acceleration clause so that on default the lender may declare the entire unpaid balance of principal and accrued interest immediately due. Stating any required notice and cure period avoids disputes about whether acceleration was proper.

• Time Limit to Sue on the Debt

  A lawsuit to collect on a written loan agreement must generally be filed within six years in Alabama, running from the default (Alabama Code Section 6-2-34, covering promises in writing and simple contracts). Keeping a signed written agreement gives you a clear, provable claim. Confirm the current deadline before filing, since it can turn on when the last payment or written acknowledgment was made.