Are interest payments made before or after repayment of the principal and are contractual interest rates payable in the cases of early loan callability?
On 27 March 2019, the Supreme Court of Cassation upheld an interpretative judgment in Interpretative Case No 3 of 2017, replying to the above two questions on which the case law had been rather inconsistent.
The first question relates to the cases of partial repayment of interest-bearing debts that is sufficient to cover the costs but not all interest rate payments and the principal. Some court judgments ruled that the legal penalty interest rates were payable before the payment of the principal, whereas others acknowledged interest payments after the payment of the principal.
Where partial repayment is made, the debtor is entitled to specify which element of the outstanding debt is to be repaid but this choice is not binding on the creditor. In its interpretative judgment the Supreme Court of Cassation ruled that when the repayment made was not sufficient to cover the whole debt (principal, interest rates and costs), the legal penalty rates were payable before the repayment of the principal.
The second question is whether the debtor has to pay the contractual interest rates on the loan or credit agreement in case of early loan callability. The Supreme Court of Cassation upheld that before the loan became callable ahead of schedule, the amount of the debt was to be established in accordance with the clauses of the loan agreement or repayment schedule. After the loan becomes callable ahead of schedule, the creditor is entitled to receive only the unpaid portion of the principal and the legal interest rates charged on that portion from the date of the early callability to the repayment date.