Is a promissory note legally binding in Pennsylvania?

Yes. A promissory note is legally binding in Pennsylvania when it's a written, signed promise to repay a set amount on stated terms. A lender generally has four years to sue on a note under 42 Pa.C.S. 5525, and Pennsylvania's usury law caps interest at 6 percent per year on many loans of $50,000 or less.

What makes a promissory note enforceable in Pennsylvania?

A court looks for the same basics it wants in any loan contract. The note should name the lender and the borrower, state the principal, give an interest rate or say the loan is interest-free, explain how and when repayment happens, and carry the borrower's signature. A clear due date or payment schedule matters too, because it decides when the clock for a lawsuit starts. The borrower also has to receive something of value in exchange for the promise, and in a loan that's the money itself, so keep proof of the transfer.

Pick a format that matches the deal. An installment promissory note suits a loan repaid in regular payments. A demand promissory note lets the lender call the loan when they choose, which changes how Pennsylvania counts the limitation period.

How long does a lender have to sue on a promissory note in Pennsylvania?

Four years in most cases. Title 42, section 5525(a)(7) sets a four-year limit for "An action upon a negotiable or nonnegotiable bond, note or other similar instrument in writing." Pennsylvania uses the same four-year period whether or not the note is negotiable.

Demand notes get a special rule in the same paragraph: "Where such an instrument is payable upon demand, the time within which an action on it must be commenced shall be computed from the later of either demand or any payment of principal of or interest on the instrument." If you demand payment and the borrower pays something afterward, the four years run from that later payment. The same rule helps the lender on a long-running demand note: each payment of principal or interest can reset the starting point.

Other written loan agreements follow section 5525(a)(8), which also sets four years for an action on a contract founded upon a writing. You can check deadlines by state with our statute of limitations lookup.

Does a note signed under seal get more time in Pennsylvania?

Yes, a lot more. Section 5529(b)(1) says: "Notwithstanding section 5525(7) (relating to four year limitation), an action upon an instrument in writing under seal must be commenced within 20 years."

That's 20 years instead of four. Whether a particular note counts as being under seal depends on how it was signed and worded, so if the longer period matters to your plans, talk with a Pennsylvania lawyer before you rely on it.

What is Pennsylvania's legal rate of interest?

Pennsylvania's Loan Interest and Protection Law, often called Act 6, sets a default. Under section 202, a document that calls for payment "with interest" without naming a rate "shall be construed to refer to the rate of interest of six per cent per annum." If your note says "with interest" and nothing more, expect 6 percent.

What interest rate limits apply to Pennsylvania promissory notes?

Section 201 of Act 6 sets a maximum lawful rate of 6 percent per year for "the loan or use of money in an amount of fifty thousand dollars ($50,000) or less". Section 201(b) lists three situations where that cap doesn't apply: an obligation with an original bona fide principal amount of more than $50,000, an unsecured, noncollateralized loan of more than $35,000, and business loans of any principal amount.

Here's how that sorts real loans. A $20,000 personal loan to a relative is capped at 6 percent, which is $1,200 of simple interest over one year. A $40,000 unsecured personal loan falls outside the cap because it's over $35,000 and has no collateral. A $40,000 personal loan secured by a car stays under the cap, because it's collateralized and not over $50,000.

The business loan exception is broad. Because section 201(b) exempts business loans of any principal amount, a loan to a relative's company or to a sole proprietor for business use falls outside the 6 percent cap even when it's small. Say in the note that the money is for business purposes, so the record matches the exemption you're relying on.

Residential mortgages, as Act 6 defines them, follow Article III. Section 301 sets their maximum at the Monthly Index of Long Term United States Government Bond Yields for the second preceding month plus 2.5 percent, rounded to the nearest quarter percent. The Secretary of Banking determines that rate each month for publication in the Pennsylvania Bulletin.

What happens if a Pennsylvania lender charges too much interest?

Act 6 gives borrowers several remedies. Under section 501, a borrower doesn't have to pay interest above the lawful rate and can deduct the excess from the debt after giving the lender notice. Under section 502, a borrower who paid excess interest can recover triple that excess, as long as the suit starts within four years after the payment.

Say you charged 8 percent on a $20,000 personal loan for one year. The excess over 6 percent is 2 percent, or $400, and triple that is $1,200. Section 503 adds the borrower's reasonable attorney's fees and costs if the borrower wins, and section 505 makes a knowing and intentional violation a misdemeanor of the third degree. Section 502 also limits the triple recovery to a four-year period of the contract, so the multiplier doesn't reach back across the whole life of a long loan.

Does a promissory note need to be notarized in Pennsylvania?

The Pennsylvania limitation and usury statutes covered here don't make notarization a condition of an enforceable note. The borrower's signature is what binds them. A notary still helps, since an acknowledgment makes it harder for a borrower to claim later that the signature isn't theirs. Keep the original signed note somewhere safe, along with your payment records, because those papers prove both the debt and the dates that start the four-year clock.

If real estate secures the loan, use a secured promissory note and check the county recorder of deeds' requirements for the mortgage before anyone signs.

Sources

• 42 Pa.C.S. 5525, Four year limitation
• 42 Pa.C.S. 5529, Twenty year limitation
• Loan Interest and Protection Law (Act 6)