Washington Loan Agreement

Introduction

Key Things to Know

1. 1

   A loan agreement captures the amount lent, the interest, the payment dates, and the default terms in one signed contract. Washington caps that interest at a floating ceiling, the higher of 12 percent or 4 points above the 26-week Treasury bill rate.

2. 2

   Washington caps interest at a floating rate: the higher of 12 percent per year or 4 percentage points above the average 26-week Treasury bill rate set the month before (RCW 19.52.020). Because the ceiling moves, confirm the current maximum before setting a rate above 12 percent, and state the rate clearly as a number.

3. 3

   If a Washington loan agreement does not state a rate, the law supplies 12 percent per year (RCW 19.52.010). To set a different rate, up to the current cap, you must agree the rate in writing.

4. 4

   You do not need a license to make an occasional private loan. Washington licenses persons in the business of making loans under the Consumer Loan Act; a non-mortgage loan by an unlicensed person who was required to be licensed is null and void (RCW 31.04.035). A one-off personal loan is not in the business of lending.

5. 5

   Usurious interest is not collectible. If a loan charges more than the lawful maximum, the lender loses the right to the usurious interest and the borrower has statutory remedies (RCW 19.52.030), so keep any private loan at or below the current cap.

6. 6

   A late fee should be reasonable. Washington sets no flat statutory late-fee cap for a private loan, so tie any late charge to your real costs from a late payment; an amount that operates as an unreasonable penalty may not be enforced.

7. 7

   Put the loan in writing and spell out default and acceleration. Define default as a payment missed 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. A lawsuit on a written contract can be brought for six years (RCW 4.16.040).

Washington Requirements for Loan Agreement

• Maximum Interest Rate (Floating Usury Cap)

  Washington caps interest at a floating maximum: the higher of 12 percent per year or 4 percentage points above the average 26-week Treasury bill rate set the month before (RCW 19.52.020). Because the ceiling moves, confirm the current maximum before setting a rate above 12 percent. State the rate as a number. Banks, credit unions, and lenders licensed under the Consumer Loan Act operate under separate rules.

• Legal Rate When the Contract Is Silent

  If a written loan agreement does not state a rate, Washington supplies 12 percent per year (RCW 19.52.010). This default applies only because the parties did not agree a rate in writing. To set a different rate, up to the current floating cap, state the agreed rate in the written agreement so the 12 percent default does not apply by accident.

• Lender Licensing (Consumer Loan Act)

  Washington licenses persons who are in the business of making loans under the Consumer Loan Act (RCW 31.04.035), and a non-mortgage loan made by a person who was required to be licensed but was not is null, void, and uncollectable. An individual who makes an occasional personal loan is not in the business of lending and generally does not need a license. Confirm your status with the Department of Financial Institutions before you lend repeatedly.

• Usurious Interest Is Not Collectible

  If a loan charges more than the lawful maximum, the loan is usurious: the lender loses the right to the usurious interest and the borrower has statutory remedies (RCW 19.52.030). Because the cap floats with Treasury rates (RCW 19.52.020), a private lender who wants to charge above 12 percent should confirm the current maximum first. The safest course is to keep the rate at or below the cap and state it clearly.

• Late Fees Should Be Reasonable

  Washington sets no flat statutory late-fee cap for a private one-off loan, so a late charge is judged under general contract law. Set any late fee as a reasonable estimate of the lender's actual costs from a late payment rather than an arbitrary penalty, because an amount that operates as a penalty may not be enforced. State the late fee and any grace period clearly in the agreement.

• Put the Loan in Writing

  A loan need not be written to be enforceable in Washington, but writing it down is strongly advised. A written agreed rate is required to set any rate other than the 12 percent statutory default (RCW 19.52.010), and a written contract carries a six-year period to sue instead of the three years for an oral one. 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 Washington (RCW 4.16.040), because an action on a written contract carries a six-year limit. An oral contract carries a shorter three-year limit. Keeping a signed written agreement gives the longer, easier-to-prove period if you have to collect.