Authors:

KADI SINK
ANNEMARI ÕUNPUU
 

Charging a reasonable fee for lending out money is generally considered a common business practice. Subsection 397 (1) of the Law of Obligations Act (LOA) also states interest shall be paid on loans granted in economic or professional activities. Unlike rent and commercial lease payments or the price of goods to be paid under a sales agreement, different restrictions have applied to the fee on loans throughout history, be it a complete prohibition on adding a fee, a maximum limit to such a fee, or a prohibition on compound interest. Such restrictions also include the prohibition established in subsection 113 (6) of the LOA stating that a penalty for late payment shall not be required for a delay in the payment of interest.

The article addresses the main issues regarding this prohibition. The first and the most important starting point is the issue of whether the prohibition to require a fine for delay should also extend to requests for default interest and fines for delay that have become due, or should it only extend to so-called prospective agreements. Secondly, is compound interest, i.e. retrospectively concluded agreements on adding the interest accumulated before the interest becomes due to the main part, and then requesting interest on the total sum received, an acceptable practice or should the possibilities of using compound interest also be restricted. Thirdly, in case of assuming the position that only prospective agreements on requesting fines for delay should be prohibited, would the restriction be justified in the case of interest.

 

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