California Loan Agreement

Introduction

Key Things to Know

1. 1

   In California a loan agreement records the lender's advance and the borrower's promise to repay, with the amount, the rate, and the payment dates in writing; a personal, family, or household loan is held to a 10 percent yearly ceiling, and when a written agreement names no rate the legal rate is 7 percent.

2. 2

   California caps interest on most private loans. Under Article XV Section 1 of the California Constitution, a loan for personal, family, or household purposes may not charge more than 10 percent per year; for other loans the ceiling is the higher of 10 percent or 5 percent plus the Federal Reserve Bank of San Francisco discount rate. The cap does not bind banks, credit unions, or licensed lenders.

3. 3

   If a written loan agreement does not state an interest rate, California law sets the legal rate at 7 percent per year (California Constitution Article XV Section 1). To charge more than 7 percent, up to the 10 percent cap, you need a written agreement that states the rate.

4. 4

   You do not need a license to make an occasional private loan. A California Financing Law license is required only of a person engaged in the business of making consumer or commercial loans (Financial Code Sections 22009 and 22100), which is regulated by the Department of Financial Protection and Innovation (DFPI).

5. 5

   A late fee must be reasonable. California treats a late charge as liquidated damages: in a non-consumer contract it is valid unless shown to be unreasonable, and in a consumer contract it is void unless the actual damage would be impracticable to calculate (Civil Code Section 1671). Keep any late fee tied to your real costs.

6. 6

   Put the loan in writing and keep it. A lawsuit on a written contract must be filed within four years (Code of Civil Procedure Section 337); an oral loan gives you only two years (Section 339). A written, signed agreement is far easier to enforce.

7. 7

   Spell out default and acceleration. Define what counts as default (usually a missed payment past a stated grace period), and include an acceleration clause so the lender can demand the entire unpaid balance at once if the borrower defaults.

California Requirements for Loan Agreement

• Maximum Interest Rate (Usury Cap)

  California caps interest on most private loans. Under Article XV Section 1 of the California Constitution, a loan used primarily for personal, family, or household purposes may not charge more than 10 percent per year. For any other loan the ceiling is the higher of 10 percent or 5 percent plus the discount rate of the Federal Reserve Bank of San Francisco. State the rate as a number and keep a personal loan at or below 10 percent unless you are exempt or licensed.

• Legal Rate When the Contract Is Silent

  If a written loan agreement does not state an interest rate, California law fixes the legal rate at 7 percent per year (California Constitution Article XV Section 1). To charge more than 7 percent, up to the 10 percent cap on a personal loan, the parties must contract in writing for the higher rate. Always write the agreed rate into the agreement so the 7 percent default does not apply by accident.

• Lender Licensing (California Financing Law)

  A California Financing Law license from the Department of Financial Protection and Innovation is required only of a person engaged in the business of making consumer or commercial loans (Financial Code Sections 22009 and 22100). 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.

• Exempt Lenders Are Not Bound by the 10 Percent Cap

  The constitutional 10 percent cap applies to private lenders, not to exempt classes. Banks, building and loan associations, industrial loan companies, credit unions, licensed pawnbrokers, licensed real estate brokers on loans they arrange, and lenders licensed under the California Financing Law are exempt from the usury limit (California Constitution Article XV Section 1). This is why a licensed consumer lender can lawfully charge more than 10 percent while a private individual cannot.

• Late Fees Judged as Liquidated Damages

  A late charge in a California loan agreement is treated as liquidated damages under Civil Code Section 1671. In a non-consumer contract the fee is valid unless the borrower proves it was unreasonable when the contract was made; in a consumer contract such a fee is void unless the actual damage would be impracticable or extremely difficult to fix. Set any late fee as a reasonable estimate of the lender actual costs, not an arbitrary penalty.

• Put the Loan in Writing

  A loan need not be written to be enforceable in California, but writing it down is strongly advised. A written contract is required to charge interest above the 7 percent legal rate (California Constitution Article XV Section 1), and it carries a four-year period to sue instead of the two years for an oral loan (Code of Civil Procedure Sections 337 and 339). Have both parties sign and date the agreement and keep a copy.

• 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 four years in California, running from the default or from the last payment or written acknowledgment of the debt (Code of Civil Procedure Section 337). An oral loan carries only a two-year limit (Section 339). Keeping a signed written agreement gives the longer, easier-to-prove period if you have to collect.