Section 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Commission to make a change in the installment lending provisions of the prior Banking Code (No. 112 (1933) Pa.L. 624 (repealed 1965)) nor to change the industry’s custom of calculating interest on a discount basis.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 Secretary’s Letter ‘‘M,’’ dated March 21, 1968.