Extremely high interest rates and APRs on consumer loans

Recently, our office has been handling a growing number of cases in which consumers have entered into (short-term) loan agreements with extremely high interest rates or APRs.

This trend, especially for so-called minute loans, raises questions about the legal protection of consumers and the validity of these loan agreements.

In the Czech Republic, consumers are protected from unlawfully high interest rates and APRs in particular by the fact that credit agreements concluded under conditions contrary to good morals can be declared void by a court. In such a case, the consumer is obliged to repay the creditor only the amount borrowed (principal) without interest and contractual penalties.

Author of the article: ARROWS (Mgr. Luděk Plachký, office@arws.cz, +420 245 007 740)

Consumer protection against unreasonable interest and APR

The Civil Code protects consumers from unreasonably high interest rates, even when the amount of interest is contractually agreed, i.e. by agreement between the debtor and the creditor. According to Section 1796 of Act No. 89/2012 Coll., the Civil Code (hereinafter referred to as the "CC"), a creditor commits usury if, when concluding a contract with a consumer, he has taken advantage of the consumer's distress, inexperience, weakness of mind or recklessness and, on the basis of such a contract, the consumer (debtor) promises or provides him with a performance whose property value is grossly disproportionate to the mutual performance.

The aim of this legislation is to protect a consumer in distress (for example, due to an unexpected financial situation) from undue pressure to accept unfavourable contractual terms. Such unfavourable terms typically include an interest rate or APR that is significantly above normal market values.

Usury is also protected against in the Czech Republic by the Criminal Code. The decision of the Supreme Court, Case No. 3 Tdo 225/2012, clarifies that in order to determine whether the consumer was in distress, it is not relevant whether the consumer caused the distress himself or whether it arose as a result of circumstances beyond his control. The key issue is whether the creditor abused its knowledge of the consumer's difficult financial situation and entered into a contract with the consumer which, as a result, is highly disadvantageous to the consumer.

Good morals and abuse of rights

Another important argument that can be used to defend against an unfavourable consumer credit contract is that the contract is contrary to good morals.

Under section 580 of the Civil Code, a legal act contrary to good morals is void. Good morals are not only characterised by formal rules but also reflect social, cultural and ethical norms.

In the context of credit agreements, this means that a contract which includes non-marketable high interest rates or APRs can be considered to be the result of conduct that violates the fundamental values on which our society is based.

The Czech courts have repeatedly ruled that disproportionately high interest rates, which can drive a borrower into insolvency, are contrary to good morals, see for example the Supreme Court's judgment in Case No. 21 Cdo 1484/2004, which draws attention to the fact that contracts whose terms are grossly disproportionate to the real value of the performance may be invalidated.

In this decision, the Supreme Court also refers to so-called "usurious interest", stating that "As a rule, the amount of interest agreed within the meaning of Section 658(1) of the Civil Code which substantially exceeds the interest rate customary at the time of its agreement, determined in particular taking into account the highest interest rates applied by banks when granting loans or credits, is contrary to good morals". This also applies to short-term loans that exploit the vulnerability of consumers.

How can I defend myself against the enforcement of unfavourable contracts?

If a loan contract is concluded with extremely high interest rates or APRs that do not correspond to market conditions, the loan contract is likely to be invalid.

Any consumer can make a basic assessment by comparing the details of their interest rate and APR in the contract with the CNB data available in the ARAD system. For February 2025, the highest interest rate provided by banks on credit cards was 24.25% per annum and the APR was at 8.57%.

If you find that your interest rate or APR is multiples above market values, it is worth defending an unfavourable credit agreement. This is most often done in court proceedings in which the creditor (the lender or its successor in title, e.g. a debt collection company) seeks payment of the amount owed, including interest and contractual penalties. The consumer is most often made aware of such proceedings by being served with an electronic payment order ("EPR")by the court . The EPR can be defended against in the first stage by filing even an unfounded opposition. However, it is not worth delaying and the opposition must be filed in time.

Lack of creditworthiness assessment

One of the common problems in the context of consumer lending is the lack of creditworthiness assessment of borrowers. According to Section 86 of the Consumer Credit Act, the provider is obliged to verify the consumer's ability to repay the loan before concluding the contract. If he fails to do so, the contract is absolutely void under Section 87(1) of the Act and the court will take this void into account even without a petition.

In practice, however, it is a rule that the courts do not fulfil this obligation and after the creditor files a motion for an electronic payment order, the court issues the order. In such a case, the ball is in the consumer's court and he must defend himself. In the subsequent proceedings, the consumer has a relatively good chance of being successful and will thus only have to repay the amount originally borrowed (the principal), against which all previous repayments will be set off in full.

On the other hand, if the consumer does not resist, the procedural benevolence of the court described above has serious negative consequences for the consumer. The consumer can easily find himself trapped in a debt trap, as he must also pay unlawfully high interest and other charges. With a large number of creditors, the only solution then becomes the debtor's insolvency. Unfortunately, for the time being, instead of protecting the weaker party, which is what the law intends, the system is becoming a tool for the effective enforcement of even invalid credit agreements. Thus, timely filing of opposition to the issued electronic payment order is crucial for the success of the consumer in the case.

Conclusion

Extremely high interest rates on consumer loans pose a serious problem for consumers who find themselves in distress and lack the capacity to assess the consequences of such a commitment.

Legislation to protect consumers against unfavourable and often abusive terms in credit agreements is an important tool to ensure that consumers are not exposed to unscrupulous behaviour by creditors.

Consumer credit agreements can be declared void by the courts if a defence is raised in time, resulting in a significant reduction in the amount originally owed, which is often made up of excessive interest, contractual penalties and other charges at excessive levels.

Finally, it is worth noting that if you took out a loan as an entrepreneur, so-called on an IČO or "trade licence", then a number of protection mechanisms do not apply to you at all.

If you are dealing with a similar predicament and it is not in your power to deal with it on your own, you can turn to us. We will be happy to help you!