Lending money to friends or family members can feel casual — but when interest is involved, it becomes a legal matter. You might wonder: can you charge interest on personal loans legally, or are there restrictions?
The short answer is yes, you can charge interest on a personal loan. But the longer answer involves state laws, usury limits, and a few rules that determine what’s legal and what isn’t. In this guide, we’ll break down the key facts so you can lend responsibly, without crossing a legal line.
What Counts as a Personal Loan?
A personal loan is any agreement between two individuals where one party lends money to another with the expectation of repayment. These agreements are often informal — between friends, siblings, or co-workers — and may not involve a bank or credit union.
Some are interest-free, but others involve interest to account for risk, inflation, or time. Once interest enters the picture, so do legal requirements.
Even if you’re not a bank, you are still subject to state usury laws — rules that limit how much interest you can legally charge.
Can You Legally Charge Interest on a Personal Loan?
Yes, you can charge interest, as long as:
- You don’t exceed your state’s legal maximum interest rate (the usury limit)
- You document the loan clearly in writing
- You follow any applicable local lending requirements
- The loan is not for business or commercial lending purposes (those have separate rules)
Each U.S. state has its own usury laws. Most allow 6% to 10% interest annually on personal loans between private parties, unless the parties agree in writing to a higher amount (within limits).
What Is a Usury Law?
A usury law is a regulation that limits the amount of interest that can be charged on a loan. Its purpose is to prevent predatory lending and protect borrowers from excessive debt.
Violating a usury law can result in:
- The lender being forced to return excess interest
- Cancellation of the loan agreement
- Fines or legal action in some cases
That’s why it’s essential to research your state’s maximum allowed rate before setting terms.
What’s a Safe Interest Rate to Charge?
To stay on the safe side, keep your interest rate:
- At or below 10% APR for personal loans in most states
- Clearly defined in a written loan agreement
- Flat or simple interest (rather than compounding, unless clearly explained)
Example:
If you lend $1,000 at 8% annual interest to be repaid in one year, the borrower would owe $1,080 at the end of the term.
You don’t need a lawyer to draft this — but it helps to use proper wording, date the agreement, and have both parties sign it.
Do You Have to Pay Taxes on the Interest?
Yes — any interest you receive from a personal loan is technically taxable income. You must report it on your federal income tax return, even if it’s just $50 or $100.
Here’s how to report it:
- Include it as “interest income” on your IRS Form 1040
- Keep a record of the loan agreement and payments
- Issue a Form 1099-INT to the borrower if interest paid exceeds $10 (optional for casual loans, but recommended for clarity)
If you don’t report the interest, you could face penalties during an audit.
Should You Put It in Writing?
Absolutely. Even if you’re lending money to a close friend or relative, a written agreement is essential when you charge interest. It protects both sides and provides legal documentation in case things go wrong.
Even if you’re lending money to a close friend or relative, a written agreement is essential — especially if you plan to charge interest on personal loans. It protects both sides and provides legal documentation in case things go wrong.
A proper loan agreement should include:
- Full legal names and contact info of both parties
- Amount of the loan
- Interest rate
- Payment terms (dates, method, amount)
- Any late fees or penalties
- Signatures of both parties and the date
Optional: You can have it notarized or witnessed for additional credibility.
How to Avoid Legal Trouble When Charging Interest
If you want to lend responsibly and stay within the law:
- Check your state’s usury limit before agreeing on a rate
- Use a written agreement — verbal promises often don’t hold up in court
- Don’t overcharge — if the rate feels too high, it probably is
- Avoid business-style lending — you’re not a bank, and if you act like one, you could be regulated like one
- Keep clear records — payment dates, receipts, and interest totals should be documented
What If the Borrower Doesn’t Pay?
Charging interest doesn’t guarantee you’ll be repaid. If the borrower stops making payments:
- First, try written reminders and friendly communication
- If that fails, consider using a demand letter
- If still unresolved, you can file a case in small claims court — especially if the loan is under your state’s small claims cap (often $5,000 to $10,000)
Your loan agreement will be essential if you go this route. Without it, your chances of recovering the money drop significantly.
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Final Thoughts
Yes, you can charge interest on personal loans — legally. But only if you follow your state’s rules, keep your rate fair, and document everything clearly. Lending to people you know can be tricky, but written agreements and awareness of legal limits help protect the relationship and the repayment.
Always double-check your local laws before setting terms, and keep records just like you would with any financial agreement. The more professional your loan looks on paper, the better protected you’ll be.
For up-to-date usury limits by state, check NerdWallet’s guide to usury laws: Nerdwallet, Finance Smarter.
