Supreme Court Decides What Makes a Loan UnfairLegal Requirements for a Loan to be 'Unfair'


A) The interest rate agreed was above the normal price of money.  The interest rate stipulated in the agreement was in the order of 24.6% APR. Since pursuant to Article  315, second paragraph,  of the Commercial Code  “any payments to be made by the borrower shall be considered when calculating the interest rate, the percentage to be taken into consideration in determining whether the interest rate is significantly higher than the normal cost of money is not the nominal rate , but rather the annual percentage rate (APR) , which is calculated taking into account any payments that the borrower has to make to the lender in respect of the loan, according to legally predetermined standards .

This extreme interpretation is essential (but not sufficient by itself) for the clause which  establishes the rate of interest to be considered transparent , because not only does it permit a more clear understanding of the burden that the credit loan supposes to the borrower or creditor , but it also enables a more reliable comparison with loans offered by the competition.

The interest rate with which the comparison is to be made is that  “normal  for money ” . It is not , therefore, compared with the ‘legal’ interest rate , but with that interest rate that is “normal or usual, taking into account the circumstances of the case and the freedom existing in such matters ‘ interest (Case no. 869/2001 of 2nd October) . To establish what is considered “normal interest rates” reference may be made to statistics published by the Bank of Spain , and taking as a basis point  the monthly information provided by credit institutions on the interest rates that are applied to various forms of lending (loans and personal loans up to one year and up to three years, mortgages with a term more than three years, current accounts, savings accounts, hire-purchase agreements, etc. ) .

That obligation held by the financial entities to provide  information on the interest rates they charge has its origins in Article 5.1 of the Statute of the European System of Central Banks and of the European Central Bank ( ECB), which details the obligation of the latter, assisted by the national central banks , to collect information through statistical operators. To this end , the ECB adopted Regulation (EC ) No 63/2002 of 20 December 2001 on statistics relating to interest rates applied by monetary financial institutions to deposits and loans vis households and non-financial companies; and thereafter, the Bank of Spain , through its Circular 4/2002 of 25 June, provided the mandatory content of the Regulation, in order to obtain the information required from the credit institutions. 

In the case under appeal , the judgment being reviewed had found as proven fact that the interest rate of 24.6 % APR – barely over double the normal average interest rate on consumer credit operations at the time when the contract was concluded – could not be criticized as excessive. However, the question is not whether or not it is excessive, but rather if it is ” significantly higher than the normal cost of money and manifestly disproportionate to the circumstances of the case ” and the 1st Chamber of the Supreme Court considered that a difference of this magnitude between the APR applied to this particular loan and the average interest rate on consumer loans on the date on which it was created, made it  possible to consider that the interest should be stipulated as ” significantly higher than the normal cost of money.”

B ) So that the loan could be considered usury it is necessary that, besides being significantly higher than the normal cost of money, the stipulated interest must be “grossly disproportionate when the circumstances of the case are taken into consideration .”     

As a matter of logic, since no test exists to determine that which is considered ‘normal’ it falls to be alleged and proven that there were exceptional circumstances that justified the ‘grossly disproportionate rate of interest’.  The financial institution that granted the “revolving”  loan did not justify the exceptional circumstances that explain the provision of a significantly higher interest than a standard loan in consumer credit.      

Generally, the exceptional circumstances which may justify an abnormally high interest rate are related to the risk of the operation. When the borrower plans to use the loan for a particularly lucrative, but high risk, operation, it is justified that the person who  finances it will , as well as having to run the risk, also benefit from the high profits expected by fixing the interest rate significantly higher than normal.

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