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Rules on Loan Defaults

What happens when a loan payment is due and you miss the payment deadline for an installment? Financial institutions who have loaned the money do not look favourably on such occurrences, but as the recipient of the loan, you should be aware that you will incur in what is known as “default interest”. Most people default for a reason, usually due to difficult financial situations so the amount that can be levied has been subject to scrutiny.

Default interest is a percentage that is added to the fee at the time the default occurs. All information regarding this percentage, the way in which will be applied and calculated, and the expenses for non-payment, must all be provided before the loan is signed by the lender or intermediary. These same conditions will also appear in the loan contract.

Rules regarding interest for defaulted payments

The law establishes a general limit to this type of interest, which cannot exceed two and a half times the legal interest rate. The legal interest rate is updated every year in the ‘General State Budget’ and for 2017, it was set at a maximum of 3%. In the case of loans for an amount lower than 200 euros, this limit does not apply.

With reference to mortgage loans, the ‘Bill’ that is hoping to reform the Mortgage Law stipulates that the default interest rate  will be three times the legal interest  to which two percentage points will be added. Interest on arrears can only be accrued on the outstanding capital and cannot be capitalized. This proposal will modify the Mortgage Law, in which the limit on interest for late payment is less than three times the legal interest ,and can be negotiated with the entity that loaned the money.

Defaults on Commercial Loans

If a non-payment occurs for commercial operations between companies, the ‘Anti-delinquency Act’ stipulates a different ‘delay’ interest, which is set by the European Central Bank each term. For the second term, the interest for delayed payment for commercial operations is 8%.

When there is no signed agreement between the parties, and there is no special provision in the regulations of the loan, the Law on Civil Procedure determines that the interest for delayed payments will be the “legal interest of the money increased by two points”.

In May 2015 the Supreme Court declared abusive the default interest that exceeds the loan interest plus 2 points. The court considered disproportioned the penalty in comparison to the damage made to the lender.

If you are in doubt about late payment fees that have been added to your accounts, or you are going to be in a debt situation with a loan, why not come and have a chat with us.