Are unsecured loans with high interest rates not illegal in Vietnam?

Judgment 45/2019/DS-ST dated July 25, 2019 on the dispute over the property loan contract of the People's Court of Ben Luc district, Long An province has the following content:

“On October 25, 2017, Mr. Huynh Le Minh T1 signed the Loan Application cum Credit Contract No. 20171026-0004706 with Bank V One Member Limited Liability Company (the Company for short) to Borrowing amount of VND 33,338,000, the negotiable interest rate is 3.92%/month, for the purpose of borrowing money for personal consumption, when borrowing Mr. T1 does not mortgage any assets for the Company.

According to the agreement in the contract, Mr. T1 is responsible for paying the Company the principal and interest amount of VND 63,544,639, payable in consecutive instalments within 36 months, specifically the first 35 months, paying the amount of 1,743 each month. 000 VND and last month pay 2,539,639 VND. The first payment period starts on December 1, 2017.

To perform the contract, Mr. T1 has received enough loan amount for personal consumption and has paid to the Company a total amount of 21,285,000 VND (of which principal debt is 12,179,696 VND, interest debt is 9,105. 304 dong). Since July 11, 2019, Mr. T1 has not paid any more principal and interest even though the Company has used many reminders.

Because Mr. T1 was late for payment, the one-member limited liability company, Bank V, sued Mr. T1 to request Mr. T1 to pay a lump sum amount of VND 42,259,639, of which: the principal is VND 42,259,639. 21,158,304 VND, debt interest is 21,101,335 VND.”

Court ruled:

Accepting the petition of the V Bank Finance Company Limited against Mr. Huynh Le Minh T1.

Forcing Mr. Huynh Le Minh T1 to be obliged to pay VND 42,259,639 to Bank V Finance Company Limited.

Unsecured loans now appear quite a lot in the consumer market to meet social consumption needs and are a modern personal finance trend in developed countries. Because the unsecured loan procedure is quite simple, creating favourable conditions for many people to access capital, sometimes this is also a "trap" set up for many people.

The 2015 Civil Code of Vietnam stipulates the interest rate as follows:

Article 468. Interest rates

1. The rate of interest for a loan shall be as agreed by the parties.

The rate of interest for a loan agreed by the parties may not exceed 20% per year, unless otherwise prescribed by law. According to actual conditions and at the proposal of the Government, the Standing Committee of National Assembly shall adjust the above interest and send report to the National Assembly at the latest session.

If the agreed interest exceeds the maximum interest prescribed in this Clause, the agreed interest shall become invalid.

2. Where parties agree that interest will be payable but fail to specify the interest rate, or where there is a dispute as to the interest rate, the interest rate for the duration of the loan shall equal 50% of the maximum interest prescribed in Clause 1 of this Article at the repayment time.

According to the regulations, if in a civil transaction there is a loan contract with an interest rate higher than that prescribed by the civil code, the excess is considered illegal and not recognized by the court. And if the borrower is sued, he only has to pay the principal and interest equivalent to 20%/year of the Civil Code.

Then why, with the interest rate of 3.92%/month , calculated over 40% a year of the bank V above for the defendant, was accepted by the court, forcing Mr. T to pay both capital and interest at an interest rate that can be added twice the legal interest rate?

To find out, let's start with what is an unsecured loan?

Unsecured loans simply mean that borrowers use their "prestige" without having to mortgage or any other guarantee conditions when borrowing money, unlike a mortgage loan, which is a type of loan that requires assets to secure the loan.

Therefore, unsecured loans contain many risks, easily becoming bad debts for credit institutions. And to ensure the costs and risks of unsecured loans, and to exploit the booming consumer credit market with huge profits waiting to be exploited, unsecured loans were born with high-interest rates.

In principle, consumer unsecured loans are also managed in accordance with the issued regulations. And if you look closely, in fact, when applying the above interest rate, credit institutions are not breaking the law. According to the provisions of Clause 2, Article 91 of the Law on Credit Institutions 2010 of Vietnam

Article 91. Interest rates and fees in business activities of credit institutions

1. Credit institutions may fix and shall publicize deposit interest rates and service charge rales applied in their business activities.

2. Credit institutions and their clients may agree on interest rates and credit extension charges to be applied to their banking operations according to law.

3. In case banking operations experience abnormal developments, in order to assure safety for the credit institutions system, the State Bank may provide a mechanism for determining charge and interest rates applicable to business activities of credit institutions.

That is, the credit institution and the customer can freely agree on the interest rate, and usually, this interest rate is usually high and is decided by the credit institution, not the customer. 

In order to easily reach borrowers, credit companies often have relationships with retail businesses to facilitate access to customers. In addition, in the process of signing an unsecured loan contract, the lender often intentionally makes the borrower unclear and confused about the interest rate. Lenders usually only tell borrowers how much to pay in a month and for how many months. Therefore, the monthly payment figure is quite low and does not affect much. But in fact, if you calculate the total payable, the borrower will have to pay a rather large amount compared to the value of the item he bought.

Although it is understandable for credit institutions to lend unsecured loans for profit, and in order to supplement the professional reserve fund when bad debts occur, it is necessary to provide consumer loans with high-interest rates to create capital. But some organizations lend to customers but do not want customers to understand the loan they need to easily offer unsecured loans. This leads to many cases where customers get frustrated when they recalculate too high a profit but only realize it when it's too late.

In addition, if borrowers do not pay on time, some credit institutions also threaten and harass customers and their families. Debt collection is easily transformed into mental terrorism, sometimes even threatening the lives of customers, causing social disorder and safety.

Therefore, a piece of advice for those who are looking for an unsecured loan: think carefully before taking out an unsecured loan. Although the procedure is simple, it is easy to access capital, but it has to be exchanged for a rather "expensive" interest rate. When taking an unsecured loan, it is necessary to understand how the interest rate of the credit contract is calculated, know the total amount of both principal and interest for this loan, in case of unfortunate events, if any. Because just a one-time late payment, the additional amount to be paid is not small, in worse cases, the lender may terminate the contract and immediately return the principal and interest. In addition, it is advisable to borrow unsecured loans in the shortest possible time. Because 24-36 month loans with very low monthly interest payments, in general, can be 2-3 times the amount you borrowed.

The above judgment, the amount borrowed by Mr. T1 is more than 33 million dong, the principal and interest to be paid is more than 63 million dong in 36 months, hopefully, will be a clear illustration of the current unsecured loan interest rate.