Pennsylvania Loan Agreement

Introduction

Key Things to Know

1. 1

   A loan agreement is the paperwork recording a Pennsylvania loan's principal, repayment dates, and interest rate, which on a smaller loan of 50,000 dollars or less cannot lawfully rise above 6 percent per year.

2. 2

   Pennsylvania caps interest on smaller loans. Under 41 P.S. Section 201, the maximum lawful rate on a loan of 50,000 dollars or less is 6 percent per year, and that ceiling is firm: on a small loan the parties cannot agree in writing to a higher rate. A borrower who paid more than the lawful rate may recover triple the excess (41 P.S. Section 502) plus attorney fees.

3. 3

   If a written loan agreement does not state an interest rate, Pennsylvania law sets the legal rate at 6 percent per year (41 P.S. Section 202). The silent rate and the small-loan cap are the same 6 percent, so leaving the rate blank does not lower your exposure.

4. 4

   You do not usually need a license to make an occasional private loan. The Consumer Discount Company Act licenses a person who is in the business of making small consumer loans of 25,000 dollars or less above the lawful rate (7 P.S. Section 6203), which the Pennsylvania Department of Banking and Securities regulates. An individual who makes a one-off loan is generally not in the business of lending.

5. 5

   The 6 percent cap does not apply to every loan. Loans over 50,000 dollars, unsecured loans over 35,000 dollars, and business loans are outside the cap, and the rate on them is freely negotiable. This loan-size test, not a written agreement, is what lets a lawful loan carry a higher rate.

6. 6

   Put the loan in writing and keep it. A written agreement is not strictly required for a loan to be enforceable in Pennsylvania, but a charge that is really extra interest still counts toward the 6 percent cap on a small loan, and any charge above what the law allows is recoverable at triple the excess (41 P.S. Section 502). A signed writing fixes the terms and is far easier to prove.

7. 7

   Spell out default and acceleration, and mind the clock. Define what counts as default and include an acceleration clause so the lender can demand the whole unpaid balance at once. A lawsuit on the debt must generally be filed within four years (42 Pa. C.S. Section 5525).

Pennsylvania Requirements for Loan Agreement

• Maximum Interest Rate (Usury Cap)

  Pennsylvania caps interest on smaller loans. Under 41 P.S. Section 201, the maximum lawful rate on a loan of 50,000 dollars or less, where no lesser rate is agreed, is 6 percent per year. On a small loan this ceiling is firm: the parties cannot contract in writing for a higher rate. State the rate as a number and keep a loan of 50,000 dollars or less at or below 6 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, Pennsylvania law fixes the legal rate at 6 percent per year (41 P.S. Section 202). The silent rate and the small-loan cap are the same 6 percent, so leaving the rate blank does not lower your exposure. Always write the agreed rate into the agreement so both sides know the number that applies.

• Lender Licensing (Consumer Discount Company Act)

  A Consumer Discount Company Act license from the Pennsylvania Department of Banking and Securities is required of a person who is in the business of making small consumer loans of 25,000 dollars or less above the lawful rate (7 P.S. Section 6203). An individual making an occasional private loan is generally 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.

• Loans Outside the 6 Percent Cap

  The 6 percent cap does not apply to every loan. Loans over 50,000 dollars, unsecured loans over 35,000 dollars, and business loans are outside the cap, and the rate on them is freely negotiable (41 P.S. Section 201). Federally insured or guaranteed loans and residential mortgages are governed by separate rules. This loan-size test, not a written agreement, is what lets a lawful loan carry a rate above 6 percent.

• Late Fees and Excess Charges

  Pennsylvania has no flat statutory late-fee cap for a private loan, but a late charge that is really additional interest counts toward the 6 percent cap on a loan of 50,000 dollars or less. Any charge above what the law allows is recoverable at triple the excess, plus attorney fees, in a suit by the borrower (41 P.S. Sections 502 and 503). Set any late fee as a reasonable estimate of the lender actual costs, not a way to exceed the rate cap.

• Put the Loan in Writing

  A loan need not be written to be enforceable in Pennsylvania, but writing it down is strongly advised. A written agreement does not let a private lender exceed the firm 6 percent cap on a loan of 50,000 dollars or less (41 P.S. Section 201); its value is fixing the terms and recording the rate. Have both parties sign and date the agreement and keep a copy so the claim on it is easy to prove.

• 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 loan must generally be filed within four years in Pennsylvania (42 Pa. C.S. Section 5525), running from the default or from the last payment or written acknowledgment of the debt. Pennsylvania applies the same four-year period to written and oral contracts, but a signed written agreement makes the claim far easier to prove if you have to collect.