Interest rate is the percentage calculated on the borrowed assets, which can be calculated monthly, annually, or daily depending on the agreement, used to calculate the amount of interest to be paid. Interest is the money or benefit that the borrower must pay additionally when the contract expires or as agreed upon. Interest is proportional to the principal debt, interest rate, and borrowing period. In this article, we limit the analysis to determine interest, interest rates in Asset Loan Contracts between individuals, legal entities that are not credit institutions with each other (hereinafter referred to as "Asset Loan Contracts") established in accordance with current legal regulations.
Applicable legal documents:
- Civil Code 2015 (hereinafter referred to as "CC 2015")
- Decree 01/2019/NQ-HDTP
For Asset Loan Contracts Without Interest And When the Borrower Fails To Repay Or Repays Inadequately Upon Maturity:
In order to ensure fairness in asset lending relationships, the law not only limits the borrower's responsibilities when the parties agree on interest, but also stipulates that the borrower must be responsible even when the contract between the parties does not specify this. Accordingly, the borrower must pay interest on the overdue principal amount at the interest rate prescribed in Article 468, Clause 2 of CC 2015 on the amount overdue at the time of repayment corresponding to the late repayment period, unless otherwise agreed or prescribed by law.
Accordingly, the "specified interest rate in clause 1" is determined to be 20% per annum. Based on this, the interest rate applied in the case of an Asset Loan Contract without interest is 50% of the 20% interest rate, equivalent to 10% per annum (0.83% per month). Apply according to the following formula:
Example: On January 1, 2022, Mr. A borrows 50,000,000 dong from Ms. B for a period of 1 year, the contract does not specify interest, the parties do not agree to extend the borrowing period. When the deadline arrives, Ms. B fails to repay the debt, after Mr. A's demand, on March 31, 2023, Ms. B pays Mr. A 50,000,000 dong. In this case, Mr. A is entitled to demand that Ms. B repay the interest on the overdue principal, calculated as follows:
- Specified interest rate: 0.83% per month
- Late repayment period: 3 months => Interest on overdue principal: 50,000,000 dong x 0.83% x 3 months = 1,245,000 dong.
For Asset Loan Contracts With Interest And When the Borrower Fails To Repay Or Repays Inadequately Upon Maturity:
In this case, depending on the repayment period, three types of interest may arise: Interest on principal within the term, interest on unpaid interest, interest on overdue principal unpaid.
First, determine the "interest on principal within the term unpaid": Interest on principal within the term unpaid is the interest amount that the borrower must pay to the lender before the due date as agreed in the loan contract. This means that the interest rate is calculated and must be paid according to the time and conditions set forth in the loan contract, this payment is usually not considered overdue. If the borrower pays the full interest within the term, there will be no overdue interest.
- In case the parties agree on the interest rate: Interest on principal within the term unpaid is calculated at the agreed interest rate but does not exceed the interest rate specified in Article 468, Clause 1 of CC 2015 (*) corresponding to the unpaid principal at the time of contract establishment.
- In case the parties agree on interest payment but do not specify the interest rate and dispute arises: the interest rate is determined at 50% of the specified interest rate in Clause 1 of Article 468 of CC 2015 – 10% per annum (0.83% per month) at the time of repayment.
Second, determine the "interest on unpaid interest": If previously the court dismissed the request for payment of interest on unpaid interest, at the present time, the court has accepted and specific provisions in CC 2015. It can be seen that the provision on interest on unpaid interest, or so-called "compound interest," is an important new point of CC 2015 compared to previous documents, aiming to protect the interests of the lender and limit the situation of "everlasting debt" of the borrower. Accordingly, in case the borrower fails to pay interest on the principal within the term, they must also pay interest on unpaid interest at the interest rate specified in Article 468, Clause 2 of CC 2015 (*) at the time of repayment corresponding to the late payment period of interest on the principal (0.83% per month), unless otherwise agreed.
Third, determine the "interest on overdue principal unpaid": Interest on overdue principal is usually calculated at a certain rate or a specific fee, and it may increase over time if the principal is not fully paid. This is to create incentives for the borrower to repay the debt on time and ensure the timeliness of interest payment under the contract. Accordingly, the interest on overdue principal unpaid is equal to 150% of the agreed interest rate in the loan contract corresponding to the late payment period, unless otherwise agreed. In case the parties agree, the interest rate on overdue principal agreed by the parties shall not exceed 150% of the interest rate specified in Article 468, Clause 1 of CC 2015 (*). Apply according to the following formula:
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Example: On January 1, 2022, Mr. A lends Ms. B an amount of 150,000,000 dong according to the Contract with a borrowing period of 1 year. The interest rate agreed by the parties is 20% per annum, with no provision for overdue interest. When due (January 1, 2023), Ms. B only pays Mr. A 50,000,000 dong of the principal and has not paid any interest according to the signed contract. After many reminders, Ms. B still procrastinates. On July 1, 2023, Mr. A filed a lawsuit against Ms. B, requesting the court to compel Ms. B to repay the principal of 100,000,000 dong and the interest calculated until July 1, 2023. In this case, interest, interest rates are calculated as follows: From the above data, determine:
- Unpaid principal amount: 100,000,000 dong.
- Agreed interest rate: 20% per annum (this interest rate does not exceed the interest rate specified in Clause 1 of Article 468 (*), so this interest rate is appropriate)
- Late payment period calculated until the date of filing the lawsuit is: 1 year 6 months. The interest amounts Mr. A demands Ms. B to repay include:
- Interest on principal within the term unpaid (apply according to formula 1): 150,000,000 dong x 20% x 1 year = 30,000,000 dong
- Interest on unpaid interest (apply according to formula 2): 30,000,000 dong x 10% per annum x 1 year 6 months = 4,500,000 dong
- Interest on overdue principal unpaid (apply according to formula 3): 100,000,000 dong x (150% x 20%) x 1 year 6 months = 45,000,000 dong In total, Ms. B has the obligation to repay Mr. A an amount of 100,000,000 dong (principal) and 79,500,000 dong (interest). The above is the advice on interest, interest rates of A&D Law Firm regarding Asset Loan Contracts that are not Credit Contracts. Please contact us immediately for detailed advice. [The content is for reference only, readers do not use it as litigation documents/references.