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PA Bulletin, Doc. No. 96-603

NOTICES

Calculation of Maximum Interest Rate Chargeable by Insurance Premium Finance Companies; Notice No. 1996-03

[26 Pa.B. 1771]

   The Insurance Department has learned that confusion may exist as to the proper calculation of the maximum interest that may be charged by Insurance Premium Finance Companies in Pennsylvania.

   The Insurance Premium Finance Company Act (40 P. S. § 3308(c)) establishes the maximum permissible interest for personal lines policies. That maximum interest is established by incorporating by reference the provisions of the Goods and Services Installment Sales Act (Installment Sales Act) (69 P. S. § 1101 et seq.)

   Section 501(a) of the Installment Sales Act caps the maximum permissible interest rate at 18% simple interest per annum. 69 P. S. § 1501(a). Section 904 (a) of the Installment Sales Act caps the maximum permissible interest rate at 1 1/2% per month, and requires that the charge be calculated on the outstanding balance. 69 P. S. § 1904(a). Thus, it is necessary that the interest rate be calculated on the declining balance of the loan.

   The following formula will identify the required monthly payment an insured would need to make in order to pay off the financed premium balance in a specified number of months at a certain rate of simple interest. This formula explicitly takes account of the declining balance of outstanding principal.

   Formula:  MP = P ÷ ((1-((1+(i÷12))exp(-1×N)))÷(i÷12))

   where:
MP:  monthly payment, as determined by the formula;

   P:  premium balance financed by the insured;

   i:  annual rate of simple interest expressed as a decimal, for example, 18.0% would be entered as .18;

   N:  number of monthly payments.

   This formula assumes that the first monthly payment is due 1 month after the premium is financed and subsequent payments are due at monthly intervals thereafter. This formula is available from the Department electronically as either an Excel or Lotus spreadsheet. The spreadsheet includes a second formula that will determine what is the equivalent simple interest rate resulting from a precribed schedule of monthly payments.

   Persons who have any questions or desire a copy of the spreadsheet, should contact:  Willard A. Smith, Chief, Financial Analysis Division, Insurance Department, 1345 Strawberry Square, Harrisburg, PA 17120, Telephone (717) 787-5890, Fax:  (717) 787-8557.

LINDA S. KAISER,   
Insurance Commissioner

[Pa.B. Doc. No. 96-603. Filed for public inspection April 12, 1996, 9:00 a.m.]


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