Are Contractual Interest Rates Due in the Case of an Early Call of the Loan?
The Supreme Court of Cassation issued Interpretative Judgment No 3/2017 of 27 March 2019 in Interpretative Case No 3 of 2017 of the General Assembly of the Civil and Commercial College of the Supreme Cassation Court to answer two crucial questions in relation to the interest charged on loans. The case law had been inconsistent on that matter.
This difficulty has been eliminated since the interpretative judgment of the Supreme Court of Cassation is binding.
The parties to pending litigation may invoke it, whereas courts hearing pending cases on matters related to the issues on which the Supreme Court of Cassation has ruled will have to comply with it in their judgments. Court judgments upheld in contravention to the interpretative judgment may be repealed by the Supreme Court of Cassation provided that they are challenged within the prescribed time limits.
The first question was related to the cases in which a partial repayment was made on an interest-bearing debt and that repayment was sufficient to cover the costs but it could not cover all interest payments and the principal in full. The dispute was whether interest had to be paid before or after the repayment of the principal.
The answer in the interpretative judgment of the Supreme Court of Cassation is that where the payment is insufficient to cover the whole debt (principal, interest and costs), the statutory penalty interest charged for payments past due is to be paid before the principal is repaid.
This is the order of payment, unless the parties have agreed otherwise.
Still, the principal is the most burdensome debt of the debtor.
The best protection of debtors under loan contracts begins at the time of negotiating the loan and even in the pre-contractual relationships. Debtors are advised to insist on contractual clauses which spell out a different debt payment order, stating that the principal is to be repaid before the interest payment. The legislation allows this type of arrangement. Thus debtors will have the opportunity to avoid an endless payment of interest in which the principal remains due and further interest is charged.
The second question which was answered in the interpretative judgment was whether the debtor had to pay the contractual interest as negotiated in the loan or credit contract in the case of an early call of the loan.
The Supreme Court of Cassation has upheld that prior to the date on which the loan is called early the amount of the debt is established in accordance with the loan contract and the existing repayment schedule.
After the loan becomes due ahead of schedule, the creditor is entitled to receive only the unpaid portion of the money lent under the contract (the principal) and the statutory interest charged thereof from the date of the early call to the date of payment.
With a view to the better protection of the debtor who is the weaker party, especially in the case of consumer credit contracts, it is necessary to consider all clauses of the agreement and the general terms and conditions. This is to be done before the contract is signed so that to ensure predictable and clear terms for the debtor to pay the debt. It is necessary to pay attention not only to the debt payment order but also to any additional charge, to the options for change of interest rates or for interest capitalization, etc.
Debtors under loan or credit agreements or contracts may exercise their rights and invoke the case law of the Court of Justice of the European Union in the interpretation of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts.