§ 13.23. Discount of installment loans.
(a) It was not the intent of the Banking Law Commission to make a change in the installment lending provisions of the prior Banking Code (No. 112 (1933) Pa.L. 624 (repealed 1965)) nor to change the industrys custom of calculating interest on a discount basis. It was the purpose of the act to clarify the prior law and the practices followed under it.
(b) It is a banking practice, in calculating discount at a $6 per $100 per annum rate, to deduct the 6% (equivalent to the $6 charge) from 100%, thus arriving at a remainder of 94%. By dividing 94% into the maximum loan of $5,000, the face amount becomes $5,319.14 resulting in discount of $319.14. The following should illustrate clearly the results of calculating interest on a discount basis versus interest on an add-on basis:
(1) Discount basis.
Principal $5,000 Plus Interest at 6% for 1 year on a discount basis 319.14 Plus Costs 150 Face amount of note $5,469.14 Less Interest and Costs 469.14 Net proceeds to borrower $5,000
(2) Add-on basis.
Principal $5,000 Plus Interest at 6% for 1 year 300 Plus Costs 150 Face amount of note $5,450 Less Interest and Costs 450 Net proceeds to borrower $5,000
(c) The Department interprets the law to mean that the maximum principal amount or net proceeds of an installment loan, computed either on an add-on basis or a discount basis, may not exceed $5,000 to a borrower.
The provisions of this § 13.23 adopted by Secretarys Letter M, dated March 21, 1968.
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