When are interest rates too high?

Thanks to persistent low interest rates, borrowers are currently receiving loans as cheaply as ever before. But complaints about supposed usurious interest probably everyone knows. 

Do consumers have to put up with usurious interest rates?

Do consumers have to put up with usurious interest rates?

The most important first: usury interest are contrary to § 138 Civil Code (BGB) illegal. They violate the morality, as it says in official German. So you do not have to accept them. If you have concluded a loan agreement with immoral interest, this is void.

But one would first have to know where the line between an outrageously high, but still legal interest rate and usury runs. The legislature remains quite vague about this. A credit agreement is immoral if a “striking mismatch” exists between the service, ie the provision of the credit , and the interest charged in return. However, there is no statutory upper limit for interest.

Market interest rates as a crucial reference for usurious interest rates

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However, there is a judgment of the Federal Court of Justice from the year 1988 (ref III III ZR 30/87), which provides more concrete indication of when usury exists. Accordingly, it can be spoken of usurious interest, if the interest rate exceeds the usual market interest rate by 100 percent – that is more than twice as high. So if this is four percent, a loan with more than eight percent interest is immoral.

However, this regulation alone would allow exorbitant interest rate differentials in high-yield phases. For example, if the market interest rate were 16 percent, an interest rate of 30 percent would still be within the permitted range, as it only exceeds the market interest rate by 87.5 percentage points.

In order to prevent such usurious interest rate differentials, the GFI refers in its judgment to the usual case law of the higher regional courts on immoral credit agreements. According to this, the situation of the interest-earning person is also fulfilled if an interest rate is more than twelve percentage points above the market interest rates. With a market interest rate of 16 percent, a loan with an interest rate of more than 28 percent falls into the category usury.

Get market interest rates

Get market interest rates

To be able to recognize usurious interest as such, you must therefore know the market interest rate. This is an average representative interest rate that banks have to pay when they raise money themselves. For short-term loans, the interest rates of the Good Finance Bank and the Honest Bank offer good indications.

By contrast, interest rates for long-term loans such as mortgage lending are based on capital market rates. This interest rate is determined primarily by the current yields of fixed income securities such as government bonds. To determine the market interest rate for long-term loans, you can therefore use the yield on the 10-year government bond.