Interest Rates Too High: Examining the Immorality of Loans

Interest rates too high
When is a loan immoral?

A guest contribution by Roland Klaus
08/10/2023, 07:00 a.m

Consumer credit and mortgage lending can be viewed as usury if they are too expensive. Then there is the possibility of reclaiming excessive interest or commissions. The current judgments show that. One bank in particular attracted negative attention.

Banks sometimes take advantage of consumers’ ignorance or distress to sell them expensive loans. However, recent court rulings show that there are limits to the interest rate on loans to private customers. If the banks overdo it, a loan can be immoral and classified as usury. With far-reaching consequences for borrowers as well as for banks and their intermediaries.

For example, the LG Hamburg (Az. 325 O 110/22) classified a real estate loan from Consors Finanz, which belongs to BNP Paribas, as immoral with an effective interest rate of 10.64 percent. The result: the contract is void. The sued credit broker has to pay back his commission of more than 5000 euros to the customer.

Excessive interest will be reimbursed

However, the classification of a loan as a usury business can also have massive consequences for banks: They have to reimburse the overpaid interest and release the customer from a current loan at his request without a prepayment penalty being due. This gives you the chance of a cheaper refinancing of the overpriced loan. Here, too, BNP Paribas has attracted negative attention on several occasions: With its brands “von Essen Bank” and “Consors Finanz”, it is bustling about in the business with high interest rates, high brokerage commissions and high costs for residual debt insurance.

In an older judgment, the Federal Court of Justice outlined when a loan becomes immoral, which is still the basis of case law today. The BGH argued (Az. XI ZR 252/89) that there is a noticeable disproportion if the contractual interest is more than twice as high as the effective interest rate customary in the market.

Poor credit rating argument doesn’t work

Many credit institutions do not accept this very clear statement in individual cases. In our experience, banks like to argue that the customer has a reduced credit rating. A significantly higher interest rate is therefore justified for him.

But this line of reasoning has now been thwarted in a remarkable judgment by the LG Erfurt (Az.: 9 O 101/23). According to the court, in the course of a careful creditworthiness check, which banks are legally obliged to carry out, there should be no increased repayment risks that should be taken into account in a surcharge on the market interest rate. Or to put it another way: credit institutions are only allowed to grant a loan to creditworthy customers – and then at an interest rate close to the market rate. If the customer is not creditworthy, he may not receive any credit at all.

Due to the extremely low market interest rates for construction financing with first-class collateral from the years 2016 to 2021, interest rates of more than 2.5 to three percent can be considered immoral. See our table:

The limits to usury are significantly higher for unsecured consumer loans. In the Erfurt case already mentioned, the customer paid debit interest of 15.2 percent. When he could no longer pay his installments, the bank sued him – and lost.

case-by-case assessment required

It should be noted, however, that the amount of interest alone is not sufficient to determine the immorality of a loan agreement. Rather, the individual circumstances must be comprehensively assessed. Consumers who suspect that their interest rates are immoral should contact a specialized lawyer or consumer advocate.

In our experience, especially in the case of consumer loans where the borrower threatens to get into a debt trap due to excessive interest rates, the assumption of the costs for a lawyer and court as part of legal aid is an option if there is no legal protection insurance. This means that consumers who do not have the necessary financial means can also assert their rights.

About the author: Roland Klaus is the founder of the revocation interest group. She helps to enforce consumer law in financial matters and is supported by specialized lawyers.