Charging interest on interest - is it legal?
Taking any financial obligation, be it on the basis of a loan, loan or lease agreement, is inextricably linked with the obligation to pay interest on capital. Simply put, interest is the cost that the debtor incurs in return for the cash payment. Their amount depends on the interest rate and the time for which the creditor made his capital available to the debtor. Interest may be calculated only on the amount of the benefit, as charging interest on interest, in the current legal status, is a prohibited phenomenon. Of course, as in any case, there are some exceptions to the rule.
The prohibition of anatocism - the charging of interest on arrears - was introduced to prevent the creation of situations in which the debtor's debt would be multiplied indefinitely. This principle applies to any type of interest, regardless of its type and source. Only two exceptions are allowed from the above. The first is the possibility for the parties to settle this issue by contract, but only after the arrears have arisen. The second one is bringing an action by the creditor for overdue interest.
It is forbidden to charge interest on interest
The concept of interest and all the principles of its formation and calculation in terms of civil law has been regulated in the Civil Code Act (hereinafter referred to as the Civil Code). In turn, the prohibition of anatocism itself was introduced in Art. 482 of the Civil Code. The purpose of the prohibition is to prevent the stronger party (the creditor) from forcing the weaker entity (the debtor) to conclude contracts that will establish in advance the obligation to pay interest on overdue interest. Were it not for this restriction, it would lead to a situation where the interest on the outstanding debt would soon exceed the underlying obligation and thus make it difficult or impossible to pay off the primary debt.
The prohibition in question is absolutely binding, which means that only in strictly defined circumstances, regulated by law, it is possible to charge interest on interest. Regulation 482 of the Civil Code does not differentiate capital interest from interest for delay or interest resulting from legal actions or the act. Moreover, that provision does not distinguish between interest for delay and interest for late payment. Therefore, it should be considered that it applies to any type of interest, regardless of its type and source, also in a situation where the failure to repay the debt is the result of a deliberate action of the debtor.
It should be noted, however, that according to the judgment of the Supreme Court of November 29, 2001, V CKN 603/00, the prohibition of anatocism "it does not apply to contracts where there is a clause according to which the principal interest, not collected by the creditor, is added to the sum of money, which then bears interest according to its own rules. Such capital interest is not overdue interest within the meaning of Art. 482 of the Civil Code". In line with the above judgment, the prohibition in question does not include the obligation to pay interest on capitalized outstanding capital interest. This prohibition already applies to the charging of interest for late payment of such capital interest.The so-called valorization of interest. Performing indexation is possible thanks to the provisions of 358 of the Civil Code and it can be applied both contractually and in court. The doctrine and jurisprudence are based on the position that the increase in the interest sum after indexation cannot be limited by the principle of prohibition of anatocism.
In addition, the prohibition of anatocism is not opposed by the provision of the contract, according to which the interest rate is increased as the delay in debt repayment progresses.
When will it be possible to accrue interest on interest?
In the current wording of Art. 482 of the Civil Code provides for two exceptions to the above-mentioned rule. The first is the admissibility of contractual regulation of interest made after the arrears have arisen. The second is the creditor bringing an action for overdue interest. It should be remembered that from February 15, 2019 - the date of entry into force of the Act amending the Act - Civil Code - the legislator repealed Art. 482 paragraph. 2 of the Civil Code, which allowed interest on interest to be charged in the case of long-term loans granted by credit institutions. In situations where the prohibition of anatocism will not apply, the amount of interest on interest may be specified in a separate agreement or may result from specific regulations.
Exceptions to the prohibition of anatocism may not apply in situations where an express provision contains a regulation specific to Art. 482 of the Civil Code as regards the charging of interest or when the use of the above exceptions would be contrary to the function and purpose of such a special provision. As an example, we can provide the Acts in the field of social insurance - to cases regulated in the insurance regulations, due to the exhaustive regulation of the issue of interest on delayed social benefits, the provision of Art. 482 of the Civil Code does not apply.
Accrual of interest on the basis of the contract
In the first of the cases mentioned in the previous paragraph, after the arrears have accrued, the parties may agree that capitalized interest will be added to the principal amount of the debt. The new sum of debt thus created may be subject to contractual interest again. If the parties fail to do so, statutory interest will be charged on the newly arisen debt.
It should be remembered that the aforementioned capitalization of interest and their aggregation with the principal amount of the debt do not occur "automatically" as a result of the debtor recognizing the existence of the debt. In order for this capitalized interest to be added, the agreement of the parties must clearly indicate it. Additionally, it is not legally possible to conclude an anatocism agreement before the interest for delay arises, just as it is not possible to conclude an agreement on capitalization of interest before it arises. The inclusion of such a provision in the contract, however, does not invalidate the entire contract - only the provision regarding the addition of interest on interest is considered invalid, the remainder of the contract remains in force.It should be borne in mind that if after the capitalization of interest and adding it to the sum of the debt, another delay in debt repayment arises, then it is not possible to add interest on the newly arisen interest, unless the parties re-draw the interest rate agreement.
As it is possible for the parties to agree on the possibility of charging interest on interest, it is also feasible to waive - "in advance" - a contractual waiver - "in advance" - by the creditor of the future right to arrears interest.
Accrual of interest on the lawsuit
The second exception to the discussed rule is the possibility of charging interest on overdue interest by bringing an action for interest. This can also be done as a result of an extension of the claim already in the course of a civil trial. At the same time, it should be remembered that this interest is then calculated from the moment the claim is extended, and not from the moment the original claim is brought to the court.
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It should be borne in mind that the possibility of charging interest from the moment the action is brought is independent of the existence of a prior agreement of the parties regulating this matter. Importantly, the parties may, by agreement, also exclude the possibility of charging interest on overdue interest, also in the event of an action by the creditor.
However, it should be remembered that according to the decision of the Supreme Court of October 5, 1994, III CZP 128/94, "Bringing an action - for the award of interest for the delay of the principal benefit in the future - does not, per se, give rise to a claim for default interest on this interest, even if it becomes due during the course of the trial. In this regard, it is necessary to extend the action to cover the arrears already arisen or to bring a separate action for it.”.
Prohibition of anatocism and long-term bank loans
As mentioned earlier, as of February 2019, it is no longer possible to charge interest on long-term loans granted by banks. This is the effect of the legislator's efforts to improve the level of repayment of loans and credits in Poland. Until this change, banks and other financial institutions charged late customers very high interest on overdue interest, which in turn translated into an "avalanche" increase in debt, as a result of which a significant part of loans and borrowers resigned from repayment.
At present, banks are no longer authorized to use such techniques. The only possibility to charge interest on due interest is the consent of the debtor after the arrears arise. Of course, banks, like any other entity, can use anatocism also if they go to court with an appropriate action.
However, it should be borne in mind that, in line with the maxim "law does not have retroactive effect", the discussed principle cannot be applied to interest due before the amendment comes into force. This means that the interest accrued before the effective date of the amendments remains in force. However, it is not possible for banks to charge interest on overdue interest in relation to loan agreements concluded before the entry into force of the amendment, if the arrears arose after its entry into force.
Interest on overdue interest - summary
The Civil Code sets out the principle according to which it is forbidden to charge interest on overdue interest. This rule is intended to limit the action of creditors who, in very short periods, charged their debtors a whole range of interest on previous interest.
Currently, the prohibition of anatocism does not apply in only two cases. One of them is when the parties agree that the interest on the original debt will be capitalized and added to the amount of the debt, and then new interest will be charged on this amount. The second is the situation where the creditor brings an action against the debtor for overdue interest. At the same time, it should be remembered that the above exceptions are excluded when the use of one of them would be contrary to the function or purpose of a special provision in relation to Art. 482 of the Civil Code.