Michigan Loan Agreement
A Michigan loan agreement sets the loan terms and caps a private loan at 7 percent per year in writing, with 5 percent applying if the rate is left blank.
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Introduction
In Michigan, a loan agreement is the written contract that records the money lent, the repayment terms, and the interest charged, and state law caps that interest on a private written loan at 7 percent per year. In Michigan the interest a private lender may charge is tightly limited. Under Michigan Compiled Laws Section 438.31 the legal rate is 5 percent per year, and the parties may agree in writing to a rate of up to 7 percent per year, so 7 percent is the maximum lawful rate on a private written loan. Charging more is usurious, and a rate above 25 percent per year is criminal usury under Section 438.41. That 7 percent ceiling binds private individuals, but it does not bind banks or regulated lenders: a lender regulated under the Credit Reform Act may charge up to 25 percent per year (Section 445.1854), which is why licensed lenders can lawfully charge more. Making an occasional private loan does not by itself require a license: a Regulatory Loan Act license is needed only by a person engaged in the business of making loans (Section 493.2), which the Department of Insurance and Financial Services regulates. Once the rate is set, a sound Michigan loan agreement names the parties, the principal, the interest rate as a number, the repayment schedule, any late fee, and what counts as default. It should include an acceleration clause, which lets the lender demand the entire unpaid balance at once if the borrower misses payments. Put the terms in writing: a written contract can be enforced for six years (Section 600.5807), and a written agreement is also what lets you charge interest above the 5 percent legal rate. DocDraft builds your Michigan loan agreement from your facts, with attorney review available before you sign.
Key Things to Know
- 1
A loan agreement puts the deal in writing, spelling out the sum borrowed, the schedule for paying it back, and the rate that applies, which in Michigan cannot exceed 7 percent per year on an ordinary private loan.
- 2
Michigan limits interest on a private loan. Under Michigan Compiled Laws Section 438.31 the legal rate is 5 percent per year and the parties may agree in writing to up to 7 percent per year, so 7 percent is the maximum lawful rate on a private written loan. A rate above 25 percent per year is criminal usury (Section 438.41). Banks and regulated lenders are not bound by the 7 percent cap.
- 3
If a loan agreement does not state a rate in writing, Michigan sets the legal rate at 5 percent per year (Section 438.31). To charge more than 5 percent, up to the 7 percent maximum, you need a written agreement signed by the parties that states the rate.
- 4
You do not need a license to make an occasional private loan. A Regulatory Loan Act license is required only of a person engaged in the business of making loans (Section 493.2), which the Department of Insurance and Financial Services regulates. A one-off personal loan is not the business of lending.
- 5
The 7 percent private cap does not bind everyone. Banks and lenders regulated under the Credit Reform Act may charge up to 25 percent per year (Section 445.1854). That is why a licensed lender can lawfully charge more than 7 percent while a private individual cannot.
- 6
Michigan sets no separate flat late-fee cap for a private loan. Because a private lender interest is capped at the 7 percent written rate, any late charge or default interest cannot push the effective rate above 7 percent per year (Section 438.31). Keep any late fee tied to your real costs.
- 7
Spell out default and acceleration, and keep the signed agreement. Define default as a missed payment past a stated grace period, and include an acceleration clause so the lender can demand the whole balance at once. A lawsuit on a written contract must be filed within six years (Section 600.5807).
Key decisions before you file
Before you file a Loan Agreement in Michigan, a few decisions shape the document: which option to choose and what each one means. The Loan Agreement guide walks through them.
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Michigan Requirements for Loan Agreement
Maximum Interest Rate (Usury Cap)
Michigan limits interest on a private loan. The legal rate is 5 percent per year, and the parties may agree in writing to a rate of up to 7 percent per year, so 7 percent is the maximum lawful rate on a private written loan (Michigan Compiled Laws Section 438.31). A rate above 25 percent per year is criminal usury (Section 438.41). State the rate as a number and keep a private loan at or below 7 percent unless you are a bank or a regulated or licensed lender.
Legal Rate When the Contract Is Silent
If a written loan agreement does not state an interest rate, Michigan sets the legal rate at 5 percent per year (Michigan Compiled Laws Section 438.31). To charge more than 5 percent, up to the 7 percent maximum, the parties must agree in writing on the higher rate. Always write the agreed rate into the agreement so the 5 percent default does not apply by accident.
Lender Licensing (Regulatory Loan Act)
A Regulatory Loan Act license, overseen by the Department of Insurance and Financial Services, is required only of a person engaged in the business of making loans (Michigan Compiled Laws Section 493.2). 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 7 Percent Cap
The 7 percent private cap applies to private lenders, not to banks and regulated lenders. A lender regulated under the Credit Reform Act may charge, collect, and receive any rate of interest or finance charge not to exceed 25 percent per year (Michigan Compiled Laws Section 445.1854). This is why a licensed lender can lawfully charge more than 7 percent while a private individual cannot.
Late Fees Are Capped by the Usury Ceiling
Michigan sets no separate flat statutory late-fee cap for a private loan. Because a private lender interest is limited to the 7 percent written rate, any late charge or default-interest component together with the note interest cannot push the effective rate above 7 percent per year (Michigan Compiled Laws Section 438.31). 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 Michigan, but writing it down is strongly advised. A written agreement signed by the parties is required to charge interest above the 5 percent legal rate, up to the 7 percent maximum (Michigan Compiled Laws Section 438.31), and a written contract carries a six-year period to sue (Section 600.5807). 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 six years in Michigan, running from the breach or missed payment (Michigan Compiled Laws Section 600.5807). Keeping a signed written agreement and a record of payments gives you a clear, provable claim within that period if you have to collect.