Loan Agreement – In-term interest rate and key notes

In business activities, a loan agreement always plays an important role, as it is a legal instrument that enables individuals and organizations to raise capital to meet their spending, production, and business needs. The popularity and practical value of this contract make it one of the most commonly concluded civil transactions in society. Among the clauses frequently agreed upon, the interest rate, especially the in-term interest rate, is always a core term that not only safeguards the lender’s benefits but also defines the borrower’s financial obligations, thereby minimizing potential disputes. Through this article, TNTP’s Lawyers will analyze the concept and legal provisions on in-term interest rate under a loan agreement (not a credit contract) and point out some key notes when agreeing on in-term interest rate in practice.

1.Concept and legal basis of in-term interest rate

“In-term interest rate” is the rate of interest agreed upon by the parties in the loan agreement, applicable to the loan within the agreed term. This is the basic obligation arising from the interest-bearing asset loan contract.

According to Article 468 of the 2015 Civil Code, the parties are free to agree on the interest rate; however, the agreed rate must not exceed 20% per year of the loan amount, unless otherwise provided by specialized laws. In cases where the parties have agreed to charge interest but have not specified a rate, the applicable interest rate shall be determined at 50% of the legal interest rate cap (i.e., 10% per year at present).

Note: Distinguishing between the in-term interest rate from the overdue interest rate and the interest rate due to late payment of interest: In-term interest rate only applies to during the duration of the loan; in case of violation of obligations, overdue interest rate or interest due to late payment of interest will be applied according to other regulations.

Thus, the law both ensures contractual freedom of agreement and imposes limits to prevent usury, thereby protecting the legitimate rights and interests of both lender and borrower.

2.Key legal provisions on in-term interest rate

• Right to agree on interest rate

According to Clause 1, Article 468 of the Civil Code 2015, the parties have rights to determine the interest rate based on their actual needs and mutual agreement. However, such rate must not exceed 20% per year (equivalent to 1.67% per month). If the contract stipulates a higher interest rate, the excess will not be valid. The parties should also note that this interest rate cap may be adjusted according to the actual situation by the Government or the The Standing Committee of The National Assembly. 

• In the absence of a clear agreement

In practice, many loan agreements only stipulate “interest-bearing” without specifying a particular rate. In such cases, the Civil Code provides that the interest rate shall be deemed to be 50% of the legal interest rate cap (i.e., 10% per year). This provision prevents abuse of ambiguity to impose unreasonable interest rates during disputes and ensures that the court has a basis for adjudication.

3.Key considerations when negotiating in-term interest rate in practice

• Form and expression in the contract

For transparency, a loan agreement should clearly specify:

• The exact interest rate (%/year or %/month);
• The time from which interest is calculated (from the signing date or a specific starting date); and
• The method of interest payment (monthly, quarterly, or annually).

Clearly and comprehensively defined contract terms help prevent misunderstandings between the parties and also facilitate a quicker and more convenient dispute resolution process when determining interest-related matters.

• Transparency of terms

The interest rate and method of calculation must be explicitly recorded. If the contract only states “as agreed” without specific figures, disputes may arise, and the statutory rate of 10% per year may apply, which may not meet the lender’s expectations or may exceed the borrower’s financial capacity.

• The legal interest rate cap

An interest rate exceeding 20% per annum shall be deemed invalid for the excess portion, resulting in the lender being unable to collect the expected interest. Parties should also stay informed of legal regulations, as the legal interest rate cap may be subject to change upon adjustment by competent authorities.

• Risk of criminal liability

In cases where the agreed interest rate between the parties is five times higher than the statutory cap (i.e., 100% per annum or more at the current time), the lender may be subject to administrative penalties for violating regulations on the management of conditional business sectors related to security and public order (Point d, Clause 4, Article 12 of Decree No. 144/2021/ND-CP on administrative penalties in the fields of security, public order, social safety, prevention of social evils, fire prevention and fighting, rescue and relief, and domestic violence prevention) or may be criminally prosecuted for the offense of usurious lending in civil transactions (Article 201 of the Penal Code 2015, as amended in 2017).

• Obligation to pay in-term interest

The parties should note that, in cases where the borrower delays or fails to fulfill their obligations, the borrower is still required to pay in-term interest (i.e., interest on the unpaid principal within the agreed term), in addition to the overdue interest.

Accordingly, pursuant to Article 5 of Resolution No. 01/2019/NQ-HDTP, the formula for calculating interest on unpaid principal within the agreed term is:

Interest = (Unpaid principal) × (Agreed interest rate or 50% of the legal interest rate cap under Clause 1, Article 468 of the Civil Code 2015 at the time of payment) × (Loan period during which interest remains unpaid on the principal).

In conclusion, interest within the term is a core provision in loan agreements, both safeguarding the lender’s rights and binding the borrower’s obligations. However, to avoid legal risks, parties must comply with the legal interest rate cap and clearly specify the terms in the contract. Where necessary, the parties should consult a lawyer when drafting a loan agreement to ensure compliance with the law and to minimize disputes.

This article: “Loan Agreement – In-term interest rate and key notes” was prepared by TNTP’s Lawyers. We hope it will be useful to our valued readers.

Best regards,