Written By PLF Law Firm

“The risks of entering Loan Agreements under the 2015 Civil Code”

The Civil Code No. 33/2005/QH11 (“2005 Civil Code”) is currently being in effect and will be replaced by the Civil Code No. 91/2015/QH13 (“2015 Civil Code”) from January 01st 2017. Basically, civil laws respect the freedom of contract of the parties, but the parties must comply with the general regulations of the law. Accordingly, although the loans are non-regular activities of the enterprises, they may bring about more legal and commercial risks for the enterprises.

1. No mandatory interest

It is misconceived by some enterprises that the Loan Agreements require the interest rate, resulting in the aversion in getting loan from partners or customers. Having interest or not is dependent on the agreement of the parties when getting loan. Therefore, enterprises can absolutely enter interest-free Loan Agreements.

2. Limitation on interest rate

In case where there is an interest rate in the Loan Agreement, such rate is limited by law. The limitation of interest rate is in accordance with laws as follows:

  • Pursuant to the 2005 Civil Code, the interest rate is agreed upon by the parties, but it must not exceed 150% of the base rate announced by the State Bank with respect to the corresponding type of loans. The determination of the interest rate ceiling is quite complicated for enterprises, which leads to the fact that the agreed interest rates of parties is often too high or too low.
  • Pursuant to the 2015 Civil Code, in case where there is the interest rate of the loan under the agreement of the parties, such rate must not exceed 20%/year. Overall such rate is higher than the rate stipulated in the previous regulations. Therefore, according to the financial capacity and the level of trust between the parties, the enterprises may carefully consider the interest rate in the Loan Agreement.

The new regulation also adds the sanctions that if the agreed interest rates exceed 20%/year, such rates do not come into effect, and the rate stipulated by law will be applied.

3. Interest on late payment is obligatory

When the enterprises providing loan without interest mainly with the purpose of support and assistance to the borrower, hence it is rare that the parties agree on the payment of interest on the late payment when the loan is due. However, the parties should be noted that even if there is no agreement, the laws still regulate the late payment amount, in case the loans are without interest:

  • Pursuant to the 2005 Civil Code, if there is no agreement, the borrower will not have to pay interest on the late payment.
  • Pursuant to the 2015 Civil Code, if the borrower does not repay or pay insufficiently when the loan is due, the lender has the right to request payment of the interest at the rate of 10% (determined by 50% of the interest rate limit).

4. Apply the late payment interest rate according to the agreement

Regarding the case where the enterprises provide loans with interests, the regulations change into the direction which is more favorable for the lenders as follows:

  • Pursuant to the 2005 Civil Code, although the parties agreed on the late payment interest rate, it is obligatory to apply the base rate announced by the State Bank corresponding to the term of loan at the time of repayment. In compliance with the 2015 Civil Code, when the loan is due and the borrower does not pay or pay insufficiently, the borrower has to pay the interest in compliance with the interest rate stated in the agreement, not the base rate prescribed in the 2005 Civil Code:
  • on unpaid due principal debts as agreed in the contract is corresponding to the term of loan; in the late payment cases, they must pay interest at the rate of 10% (determined by 50% of the interest rate limit).
  • If there is no agreement, interest on the outstanding of overdue principal debt  is 150% of the contractual interest rate corresponding to the term of late payment.

It is noted that the interest which the borrower must pay in accordance with the 2015 Civil Code is more than the interest stipulated in the old provisions because the agreed interest between the parties is usually higher than the base rate of the State Bank.

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