Can you charge interest on a verbal loan in Arkansas, and does the 17% usury cap still apply?

Plain-English summary

Representative Jimmy Gazaway asked whether interest can be charged on a verbal loan or contract under Arkansas law. The trigger for the question was Ark. Code Ann. § 4-57-104, which says parties "may agree in writing to the payment of interest" up to the rate set in Amendment 89. The "in writing" language raised the question of whether an oral interest agreement is enforceable at all.

The AG answered yes to all three questions. Arkansas does not require interest agreements to be in writing. The "in writing" language in § 4-57-104 is best read as setting the ceiling for what parties can agree to in writing, not as a prerequisite to charging interest at all. Section 4-57-101(a) explicitly contemplates "verbal contracts" with interest. The constitutional 17% usury cap from Amendment 89, Section 3 applies to verbal contracts the same as written contracts. And the statute of frauds (Ark. Code Ann. § 4-59-101) still requires writing for certain transactions: agreements to answer for another's debt, agreements not performable within one year, agreements to extend or modify credit over $10,000, debts discharged in bankruptcy, and similar situations.

Currency note

This opinion was issued in 2018. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

How the AG read the interaction of Amendment 89, § 4-57-101, and § 4-57-104

Amendment 89 (ratified 2010). Replaced the older usury cap framework. Section 1 lifts caps on government bonds and loans. Section 2 sets the cap on loans by federally insured Arkansas-headquartered banks at the rate "applicable to federally insured depository institutions under 12 U.S.C. § 1831u effective on March 1, 2009." Section 3 is the catch-all: 17% per annum on all "loans or contracts not described in Sections 1 and 2."

Section 4-57-101(a). Authorizes interest calculations on "any . . . written or verbal contract, or in any public or private instrument whatever." This statute treats verbal contracts on equal footing with written ones for interest purposes.

Section 4-57-104. Says parties "may agree in writing to the payment of interest" up to the Amendment 89 cap. The AG read this as a usury-protective ceiling for written agreements, not a writing requirement for interest agreements generally. Reading the statute otherwise would render § 4-57-101(a)'s "verbal contract" reference superfluous and would lead to "absurd consequences."

Statute of frauds, § 4-59-101. Requires writing for certain agreements regardless of whether interest is involved:

• Agreement to answer for another's debt, default, or miscarriage.
• Agreement not performable within one year.
• Promise to pay a debt discharged in bankruptcy.
• Agreement to extend or renew credit over $10,000.
• Promise made after full age to pay a debt contracted during infancy.

A verbal interest agreement that fits one of these categories needs to be in writing not because it has an interest term but because the underlying transaction triggers the statute of frauds. Even within the statute of frauds, doctrines like part performance can rescue an oral agreement (Moore v. Wallace).

Why a verbal contract counts as a "contract" under Amendment 89. Black's Law Dictionary defines a contract as "an agreement between two or more persons creating obligations that are enforceable . . . at law." Arkansas's elements of contract formation (Ward v. Williams) are competent parties, subject matter, legal consideration, mutual agreement, mutual obligations. Verbal agreements meeting these elements are contracts. The AG cited Campbell v. State for the canon that constitutional words get their "obvious and natural meaning."

Common questions

I lent my brother $5,000 on a handshake at 8% interest. Is the interest enforceable?
Under Arkansas law as the AG read it in 2018, yes, assuming the handshake satisfied basic contract elements (offer, acceptance, consideration, mutual understanding). The 8% rate is below the 17% Amendment 89 cap. The under-$10,000 amount means the statute of frauds writing requirement for credit extensions does not apply.

I lent my friend $20,000 verbally at 6% interest. Enforceable?
Likely problematic. Section 4-59-101(d)(1) requires agreements to extend credit over $10,000 to be in writing. Without a writing or some part-performance theory to take the agreement out of the statute of frauds, the agreement may be unenforceable.

Can I charge 25% on a verbal loan?
No. The Amendment 89 cap of 17% applies to verbal contracts the same way it applies to written ones. Section 3 is a catch-all. Pestilence between parties cannot circumvent the constitutional ceiling.

Does it matter whether the borrower is a consumer or a business?
Amendment 89 does not draw that distinction. The 17% ceiling applies to "loans or contracts not described in Sections 1 and 2."

What about late fees?
The AG defined "interest" as "discount points, finance charges, or other similar charges that may be . . . received . . . from time to time in any loan or financing transaction" (citing Amendment 89, Section 2 and Sanford v. Walther). Late fees that function as finance charges may count as interest for the cap.

If we did not specify a per-annum period, how is interest calculated?
Section 4-57-101(a) provides the default rule: if the contract mentions a rate but not a period, "interest shall be calculated at the rate mentioned by the year, in the same manner as if the words 'per annum' or 'by the year' had been added to the rate."

Background and statutory framework

Amendment 89 was ratified by Arkansas voters in 2010, replacing the older Article 19, Section 13 (as modified by Amendment 60). It also replaced the interest-rate provisions in Amendments 30, 38, 62, 65, and 78. The 17% catch-all in Section 3 is the modern Arkansas usury cap for non-bank, non-government loans.

The opinion is methodologically conservative. It declines to do fact-finding (per Op. Att'y Gen. 2015-005 and § 25-16-706) and limits itself to general principles. It also declines to opine on whether particular oral agreements satisfy the statute of frauds, because that is a fact-intensive question.

The interpretive backbone is the harmonization canon from City of Ft. Smith v. Tate: statutes on the same subject must be construed together and reconciled if possible. The AG used this to reconcile § 4-57-101(a) (allowing verbal interest contracts) with § 4-57-104 (referencing "in writing"). Reading § 4-57-104 as a usury ceiling rather than a writing requirement preserves both statutes.

Citations

• Ark. Const., amend. 89 (interest rates)
• Ark. Code Ann. § 4-57-101 (interest calculation default)
• Ark. Code Ann. § 4-57-104 (maximum rate of interest permitted)
• Ark. Code Ann. § 4-59-101 (statute of frauds)
• Ark. Code Ann. § 25-16-706 (AG opinion authority)
• 12 U.S.C. § 1831u (federal interstate bank deposit requirements)
• Sanford v. Walther, 2015 Ark. 285, 467 S.W.3d 139 (definition of "interest")
• Becker Provision Co. v. Parker Hardware Co., 146 Ark. 539, 226 S.W. 177 (1920) (oral contract enforceability)
• Everton v. Day, 66 Ark. 73, 48 S.W. 900 (1898) (verbal interest agreements)
• Cobb v. Leyendecker, 89 Ark. App. 167, 200 S.W.3d 924 (2005) (three-year limitations on oral agreements)
• Moore v. Wallace, 90 Ark. App. 298, 205 S.W.3d 824 (2005) (part-performance exception)
• Ward v. Williams, 354 Ark. 168, 118 S.W.3d 513 (2003) (elements of contract)
• Campbell v. State, 300 Ark. 570, 781 S.W.2d 14 (1989) (constitutional construction)

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

Opinion No. 2017-083
February 1, 2018
The Honorable Jimmy Gazaway
State Representative
800 West Court Street
Paragould, AR 72450-5952

Dear Representative Gazaway:

I am writing in response to your request for an opinion from this office concerning whether interest may be charged on a verbal contract, agreement, or loan. In this regard, you have provided the following background information:

Under Ark. Code Ann. § 4-57-104, the maximum rate of interest permitted in this State shall not exceed the applicable rate of interest set forth in the Arkansas Constitution, Amendment 89, which reads:

4-57-104. Maximum rate of interest permitted.
The parties to a contract may agree in writing to the payment of interest not exceeding the applicable rate of interest, if any, set forth in Arkansas Constitution, Amendment 89, on money due or to become due.

Under Arkansas Constitution, Amendment 89, section 3, the maximum interest rate for all loans and contracts other than loans made by or to government entities and loans by federally insured depository institutions is seventeen percent (17%) per annum:

§ 3. Other Loans. The maximum lawful rate of interest on loans or contracts not described in Sections 1 and 2 shall not exceed seventeen percent (17%) per annum.

In light of the above referenced background information, you have asked the following questions:

1) May interest be charged on a verbal contract, agreement, or loan if there is nothing in writing that is signed by the party that is charged interest?

2) Are verbal contracts, agreements, or loans "loans or contracts not described in Sections 1 and 2" as contemplated by Amendment 89?

3) Since § 4-57-104 specifies that the parties to a contract may agree in writing to the payment of interest not exceeding the applicable rate of interest, if any, set forth in Arkansas Constitution, Amendment 89, on money due or to become due, may interest be charged under a verbal contract, agreement, or loan?

RESPONSE

Your questions concern two related issues: Whether verbal contracts involving interest payments are valid under Arkansas law, and whether the maximum interest rate established by the Arkansas Constitution applies to verbal contracts involving interest (assuming they are permitted). Arkansas law does not, in my opinion, confine agreements calling for interest payments to written contracts. And there is no exception to the constitutional maximum interest rate for verbal contracts. I would caution, however, that matters of contract are by nature fact-intensive. Addressing factual iterations is beyond the scope of an opinion, so my response must be limited to a discussion of legal principles.

Subject to these limitations, I believe the answer to your first question is "yes." A party may generally make an enforceable, verbal agreement to be charged interest. Nevertheless, there are a number of situations where a contract requiring interest payments would need to be in writing pursuant to the Arkansas statute of frauds. The answer to your second question is also "yes," since verbal contracts are not among the contracts specified in sections 1 or 2 of Amendment 89. And I believe the answer to your third question is "yes."

DISCUSSION

[The opinion analyzes each question:

Q1: Generally, "[i]nterest is allowed as a contractual right if it is provided for in the contract." Verbal agreements are enforceable so long as not required by statute to be in writing. Section 4-57-101(a) expressly contemplates verbal contracts containing interest terms. The statute of frauds at § 4-59-101 requires writing for: agreements to answer for another's debt; agreements not to be performed within one year; promises to pay debts discharged in bankruptcy; agreements to extend or modify credit over $10,000; and promises made after full age to pay debts contracted during infancy. A verbal contract that falls within these categories must be in writing to be enforceable.

Q2: A verbal agreement is among the "loans or contracts not described in Sections 1 and 2" of Amendment 89. The cardinal rule is that constitutional words get their obvious and natural meaning. Verbal agreements meet the definition of "contracts" generally, and they are not referenced in section 1 (government bonds and loans) or section 2 (federally insured Arkansas-headquartered banks).

Q3: The "in writing" language in § 4-57-104 does not lead to the conclusion that interest rates can only be established in writing. Statutes must be construed to give effect to plain meaning and not lead to absurd consequences. Reading § 4-57-104 with § 4-57-101(a) (which authorizes verbal interest contracts), the AG concluded that § 4-57-101(a) is the general authorization for verbal contracts involving interest (subject to the statute of frauds), and § 4-57-104 is the usury ceiling for parties who agree in writing to specific interest rates (subject to the Amendment 89 cap).]

CONCLUSION

Arkansas law does not restrict agreements involving interest payments to written contracts. But any such verbal contract would be subject to the constitutional maximum interest rate of 17 percent, as well as to the statute of frauds where it applies. And because matters of contract are fact-intensive, I cannot opine beyond noting these principles of law.

Sincerely,

LESLIE RUTLEDGE
Attorney General