Point of View | Determination of the Nature of Prepaid Interest
Published:
2023-12-22
In judicial practice, there are different views on whether prepaid interest can be identified as beheading interest, and this paper mainly discusses the determination of the nature of prepaid interest.
In a dispute over a private loan case, creditor A and debtor B have multiple loan transactions. Creditor A requires debtor B to pay the monthly interest on the current loan on the day or the next day after paying the loan to debtor B according to the loan contract. Debtor B pays the interest in advance according to the agreement. After that, debtor B is unable to repay the loan. Creditor A filed a lawsuit after repeated unsuccessful collection. In the process of litigation, debtor B believes that the early payment of interest is a cut-off interest, should be deducted from the principal, creditor A believes that this is the interest paid by B, can not be counted as principal. This led to controversy.
Private borrowers, financial institutions or loan companies and other borrowers to lend to the lender first to the lender should pay the monthly interest or annual interest from the loan principal deduction, the remaining principal and then lend to the lender, the part of the lender before the first deduction of interest is called "beheading interest". According to Article 670 of the the People's Republic of China Civil Code, "the interest on the loan shall not be deducted from the principal in advance, and if the interest is deducted from the principal in advance, the loan shall be returned and the interest shall be calculated according to the actual amount of the loan", so the law of our country does not recognize the cut-off interest, and the loan contract stipulates that the amount of the loan shall be subject to the actual amount of the loan. According to the author's legal practice, prepaid interest is in short-term loans (such as ten days, fifteen days, one month, etc.). After the borrower fulfills the loan obligation according to the loan contract, the lender is required to pay all the interest payable within the loan period in advance or monthly in advance within a very short period of time such as the day or the second day of the loan, and the lender pays the interest as agreed. It can be seen that there is a significant difference between prepaid interest and cut-off interest, the biggest difference being the timing of interest payments and the amount borrowed. In the case of beheading interest, the amount actually received by the borrower is lower than the amount of the loan agreed upon in the loan contract, and the time of interest payment is before the loan is made, while in the case of prepayment interest, the amount actually received by the borrower is equal to the amount of the loan agreed upon in the loan contract, and the time of interest payment is after the loan is made.
In judicial practice, there are different opinions on whether the prepayment interest can be regarded as the beheading interest. The first opinion holds that the interest is the yield calculated according to the interest rate agreed in the loan contract, which is the cost that the borrower should bear for fully controlling and using the loan principal. If the interest is deducted from the loan principal in advance, the capital conditions for the borrower to create economic benefits by using the principal will undoubtedly be restricted, nor can the borrower completely control and use the loan principal agreed in the loan contract. Therefore, it can be considered that the prepayment of interest is the legal effect of the borrower taking advantage of its own dominant position and circumventing the legal provisions to realize the "deduction of interest in the principal in advance" in disguise. It belongs to the atypical situation of "interest deduction in the principal in advance", and the prepayment of interest should be regarded as the cut-off interest, the Supreme People's Court holds the same view in the cases of (2018) Supreme People's Court No. 467 and (2020) Supreme People's Court No. 140. The second view is that the entry into force of the loan contract is premised on actual payment, and the actual loan amount is subject to the loan amount received by the lender, while the advance payment of interest is the performance of the lender's control and control over the borrowed money, and is the agreement of the method of interest payment by both parties to the contract, the true expression of intention belonging to both parties does not violate mandatory provisions such as laws and regulations. The Supreme People's Court holds this view in (2020) Supreme Law No. 281.
The author tends to agree with the second view, that there is a clear difference between prepaid interest and beheading interest, and that prepaid interest cannot be regarded as beheading interest. In the specific case of "interest prepayment", the actual amount received by the lender is consistent with the loan amount agreed in the contract. According to the law of "possession is ownership" of money, the lender can control and control the principal of the loan. Therefore, comprehensive consideration should be made according to the time of payment of loan interest, loan amount, loan term, loan interest rate, and the status relationship between the borrower and the lender: if the loan contract has a clear written agreement on the payment time of the loan interest, the actual loan amount, the loan interest rate, etc., and there is no fraud, coercion, etc. between the borrower and the borrower, even if the borrower uses its own advantages to enter into a contract clause to pay interest in advance, this is also the true intention of both parties to the contract on the payment method of interest, and does not belong to the provisions of Article 670 of the Civil Code on deducting interest in advance in the principal, it shall be valid if it does not violate the mandatory legal provisions such as laws and regulations; if the loan contract has no written agreement on the payment time of the loan interest, or the borrower uses its dominant position to cheat and coerce the lender to pay the interest in advance, or the interest rate paid in advance has exceeded the upper limit of the law, or there is a situation that other borrowers maliciously evade the law, prepaid interest paid or interest paid in excess of the limit prescribed by law may be recognized as cut-off interest, which shall be deducted directly from the principal.
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