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Predatory interest on consumer credit contracts – to pay or not to pay?
The conclusion of loan contracts in practice has become a normal consumer behaviour, especially in the light of the crisis period where a solution is sought to escape financial difficulties. Therefore, it is needs to be reminded to pay attention when concluding loan contracts. The law of obligations act distinguishes loan and credit agreements. A consumer credit contract is a credit contract by which a creditor in the course of the economic or professional activities thereof, grants or undertakes to grant credit or a loan to a consumer.
Inevitably, there are often situations where consumers are experiencing difficulties in the performance of consumer credit contracts and are late in payment. To certain extent the creditor wishes to defend itself against losses therefore interest on arrears shall be implemented to the debtor.
What to look for in the creditor’s claims?
(1) The creditor cannot demand higher penalty interest than the rate provided by law
In the event of a delay in the performance of a financial obligation, the creditor may demand interest on late payments from the debtor. The interest rate specified in the LOA art 94 plus eight per cent per year shall be the rate of penalty for late payment (EURIBOR). The legislator has explained that the consumer cannot be charged interest higher than the interest rate provided by law in the event of delays in payment. Therefore, the maximum legal interest rate can reach 8% per annum, i.e. around 0.02%per day.
2) The interest rate prescribed by the contract cannot exceed three times the interest rate
If a contract prescribes payment of interest exceeding the rate provided by law, the interest rate prescribed by the contract shall be the rate of penalty for late payment. This means that the debtor must take into account with the obligation to pay interest on the basis of the interest rate prescribed in the contract. However, this does not mean that with a contract it can be agreed on any amount of interest. Despite this, service providers in many cases charge unacceptably high interest rate, mostly between 32.5% and 182.5% a year. The Supreme Court has expressed an opinion on the scope of a reasonable interest rate, according to which, a margin of default interest contracts concluded with a consumer where the interest rate exceeds three times the statutory interest rate must be presumed to be void.
3) In addition to default interest, the creditor cannot demand a contractual penalty
It has been found in practice that the creditor cannot supplement the contract and demand from the consumer a contractual penalty in addition to the interest. An agreement that deviates from the law is void. However, it must not be forgotten that, although a contractual penalty cannot be imposed regarding the cancellation of the contract, the application of the contractual penalty for other infringements is not precluded. Therefore, a contractual penalty can be imposed, for example, if the debtor has not submitted the documents required under a particular contract in a timely manner. But the debtor may request a reduction of the contractual penalty analogically with default interest.
The consumer has the right to demand the refund of an impermissible interests
The law leaves the right for the person liable for the payment of default interest to demand a reduction for the unreasonably high interest rate. If the consumer has already paid default interest at an impermissible rate, they can request for a refund. In that case, however, it must be taken into account that the service provider is still entitled to default interest (i.e. 8% a year) in accordance with the law. In conclusion, it is reasonable to read a contract carefully before signing it and to pay particular attention to the obviously high interest rates.
Reelika Rohi/ LEADELL Pilv Advokaadibüroo lawyer
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