Revolving credit cards

 

This article comments the last Spanish Supreme Spanish Supreme Court ruling of March the 4th 2020 on usurious interest rate on credit cards.

What is usury?

Nowadays usury is defined as illegal or unproportionate rate to loans. See for instance this definition.

Usury laws

In the UK the usury laws were repealed as long ago as 1854. Nowadays society is asking for those laws back. You can read here and also here.

In Spain we have an Act of 1908 which is still in force. This law mades void and null the contract where an usurious interest is applied. Usurious is when the interest rate is rather higher than the normal money interest legal rate or disproportionate taking into account the case circumstances. And when the context leads to think that the loan was accepted because of a desperate situation, lack of experience or because of limited mental capacity.

The historic context of this Act was that shortly before the freedom of charges had been approved. The government wanted to avoid immoral loans applying huge interest rates (due to the freedom of charges policy) to people. So the lenders’ protection was at the core of the Act.

The case

The case examined by the Spanish Supreme Spanish Supreme Court was about a credit card charging a rate of almost 27% on credit payments and cash withdrawal. Also, the mechanism of these cards called “revolving” are that they allow you to pay in small stallments the capital used. But those instalments includes almost nothing of capital and plenty of interest because is very high. And all the interest and capital pending are added to the debt amount which is paid by the same system so making a big ball which total payment last a long time and ends up being much higher amount than the one really used finally.

The Bank of Spain has recently added some useful information in its website on this issued due to the claims’ amount received. You can check that information in English in this link.

The ruling

So the Spanish Supreme Spanish Supreme Court ruled on this issue which we will try to explain as follows:

Consumers only? No. All lenders are affected

It is important to stress that the Usury Act 1908 affects all lenders and not just consumers (even if this article talks mainly about consumers it is important to clarify that any lender affected is able to claim based on this Act).

Abusiveness

A previous consideration is to state that the interest rate stipulation of the loan cannot be examined from an sbusiveness point of view as it is the essential point of the contract. Otherwise, it will be a price control. And the law allows freedom of charges and prices in general.

So, unless the interest rate stipulation is not readable or lacks of a minimum clarity the abusiveness cannot be assessed. And usually the contracts shows very clearly which one is the APR which stands for Annual Percentage Rate (this is the interest rate plus expenses, fees, other charges, etc). So the stipulation is easily understandeable and therefore transparent enough.

Usurious

So the issue is to assess if the interest is usurious taking into account the normal interest rate.

And the assessment means to compare the rate applied with the normal interest rate of the industry. The normal rates can be checked with the information on rates of any kind that the Bank of Spain publishes every month (you can check the January 2020 information here). So we have to compare with the normal interest rate for consume credit and, more specifically for credit cards.

And taking into account that the rate applied was of 27% and the average of almost 20% the Spanish Supreme Court understand that this is rather higher than the normal rate. The reasons to reach this conclusions are:

  • The higher the normal rate is the easier is to become usurious if raised. The Spanish Supreme Court do not assess if the normal (market) interest is high or low but only if it is rather higher than the normal. So in this case, from 20 to 27 it is rather higher and therefore usurious.
  • There are no special circumstances in the specific case to justify this higher interest. The fact that these loans are easy and quick to get assuming the creditor a higher risk because they do not have time to check solvency properly is not enough. This are the usual circumstances to grant this credit cards to consumers so the bank should prove special specific circumstances of every case to justify this higher than normal rate.
  • There is no need to take into consideration the personal circumstances of the lender as described on the Usury Act of 1908. So there is no need to prove that the lender was in a desperate situation or lacks of financial experience, or even has limited mental capacity. It does not matter. Obviously if this applies there are even more reasons to declare that the loan or credit card is usurious.

The consequence is that the loan is void and null completely and the lender has to pay back only the capital with no interest at all.

Reaction to the ruling

Consumers are very happy. Actually, all lenders are happy.

The bank industry is not as happy as the lenders.

The legal community is divided. From one side there are very relevant voices stating that the Usury Act 1908 should not be applied to a specific industry mainly because the Act was approved taking into consideration the people. So the subjective perspective was essential. And the Spanish Supreme Court waives this part of the usury definition to concentrate only and mainly on the interest rate issue assessment. Secondly, because the times have changed a lot. So in 1908 the lenders were vert few and the negotiations were made one to one. Currently all these loans and credit cards contracts are subject to conditions which is a completely different world.

Another view of the whole thing is that the Spanish Supreme Court is just applying an old Act to the current times which is good.

What the Spanish Supreme Court could have provided with was some more specific instructions to assess when an interest rate will be rather higher than normal. But there is a guideline which will base the bank industry defence in my opinion: the special circumstances of the case. So we will have to take into consideration the special purpose of the loan if any. And we will have to be careful with that point in the case it was discussed when applying for the loan or the credit card. And take into account that nowadays there might be emails, recorded conversations, detailed application forms, etc. that the court can check.

What will happen from now on?

That presumably there will be thousands of  new claims to court on these loans and credit cards. And I am a lawyer and you might think this is good for me. But this is not my view. Courts are so overloaded already and this ruling will load them even more with small claims which will delay everything. Absolutely everything. This is my view. I am not saying that lenders should not claim. I am saying that these claims should not get to court and be dealt out of it if possible.

P.S.:

This situation is good for our society to think deeply on issues such as the debt culture, responsible credit and financial advice and education. But seriously form now on. These are issues that already are in Europe’s political agenda for sure. And this ruling is a good opportunity to keep thinking about it. We should as a society I think.

Thank you

Thank you for your time and attention and I hope this information is of use. You are very welcome to share if you liked it.

Warning

Please, note that this is general information. This is not specific legal advice. It is advisable to seek legal advice for any specific legal issue.