Usury in personal loan interest rates

16 / Jul

Everyone who has taken out a personal loan in recent years has noticed the rise in interest rates. Whether it is a short-term or long-term loan, you end up paying a high amount of interest.

When extremely high interest rates are applied, the Supreme Court declares them to be usury, but in which situations?

General requirement

First, the ruling only considers personal loans with a term of more than five years. This excludes quick loans that must be paid back in a short period of time.

Since 1908 Spain has had a Usury Law that regulates the cases in which usury can occur in loan contracts, but the thing is that its first article only indicates that it is usurious when an interest rate is stipulated that is significantly higher than the normal interest rate for money and manifestly disproportionate to the circumstances of the case.

It is a very generic wording, which leaves room for interpretation, although the first part, the general part, deals with a mathematical calculation rather than an application of the circumstances of the case.

To assess whether there is a significantly higher interest rate than normal money, we should look first at the APR (Annual Percentage Rate of Charge). The APR is an indicator of an annual percentage to compare the effective cost of the loan in a specific term. It includes the interest rate, together with the other expenses that are generated throughout the loan.

On the other hand, we must have a point of comparison. The point of comparison is the statistics published by the Bank of Spain, based on the information received from credit institutions on the interest rates applied to the different types of loans.

Once we have these two values, we must compare them. How much is the exact percentage difference for usury to exist has not been established by the legislator, but in the ruling the Supreme Court mentions that usury existed in a loan with an APR (17.23%) that exceeded the average interest rate (11%) by 50%.

Circumstances of the case

The second requirement of the law is that the circumstances of the case must be considered when deciding whether the difference between the APR and the average interest rate can be considered usury. A very clear example in the judgment referred to is the case where a person takes out a personal loan to pay off another personal loan that is about to mature.

In this case it can be considered that there is a renewal of the maturity and that the bank can agree on higher interest rates for this renewal. This is especially the case when the original loan has a higher cost than the new interest rate.

In other words, if you have a loan with an APR of 14% and you take out a new loan to pay off the old one and this new loan has an APR of 13%, it is not considered usury even if the average interest rate is set at, for example, 8%.

Do you want us to assess your case to see if there is usury or not? Do not hesitate to contact us.

Selena Escandell Beutick