2

An acquaintance asked me to lend him money. I believed his story and lent him $100. He promised to pay me back $150 in 5 days time. It's been months and he hasn't paid me anything. I have heard that this interest rate is illegally high for a loan. Is this correct? I hadn't really consider this to be a loan but I guess it is.

How can small loan lenders protect themselves? Going to court for such a small amount isn't worth it and I don't know his current address. Would have holding collateral been a legal solution? Some loan agreements found on Docracy have terms that may mitigate the impact on the lender when the borrow doens't repay (on time).

Late Charge: Any payment not remunerated within 10 days of its due date shall be subject to a belatedly charge of 5 percent (%) of the payment, not to exceed $500 for any such late installment.
...

Collection fees: If this note is placed with a legal representative for collection, then Borrower agrees to pay an attorney's fee of ten percent (10%) of the voluntary balance. This fee will be added to the unpaid balance of the loan.
...
Costs: The Borrower shall be liable for the costs, if any, in respect of the drafting and execution of this contact [sic].

Would any of these terms or similar ones make it productive to take legal action against a borrower of $100? Would a term like "if the lender needs to resort to legal action to enforce a term of this agreement, the borrow will reimburse him for all related expenses and his time" be enforceable?

3
  • 1
    Do you have something in writing showing that you lend $100 and that they agreed to pay back $150 at some specific time? Or was this just a verbal agreement?
    – quarague
    Nov 7, 2022 at 8:47
  • @quarague it was text messages Nov 7, 2022 at 16:07
  • @CoriolisForceFighter, while digital messages can be evidence, I expect you know that screenshots can be edited.
    – o.m.
    Nov 7, 2022 at 19:42

2 Answers 2

3

I have heard that this interest rate is illegally high for a loan. Is this correct?

Yes. This is an annualized interest rate of 715,586,124,880,210%, which is far, far in excess of the maximum interest rate allowed by law.

The maximum legally allowed interest rate in British Columbia is 60% per annum. So, an interest rate of 65 cents or more in a five day period on a loan of $100.00 is illegal.

I don't know his current address.

Lending money without collateral to people without knowing their current address is just plain stupid when it comes to lending practices. Nobody does that without a primarily donative intent.

Would have holding collateral been a legal solution?

Potentially. This is essentially the business model of a pawn shop.

In the case of a pawn shop, the borrower delivers tangible personal property to the pawn shop owner who takes custody of it, which serves as collateral for a small loan with a set, legal interest rate, for a fixed period of time much greater than five days (typically several weeks or to several months). If the loan is not repaid, the collateral becomes the property of the lender in full payment of the loan, and the parties haggle in advance over the fair market value of the collateral against which the customer may borrow the full amount.

A pawn is essentially equivalent to an outright sale of tangible personal property (almost always used) in exchange for cash, with a right to rescind the deal for a modest interest charge within X number of days after the sale.

Since the pawn shop owner has some asset of the borrower to collect from in the event of non-payment, and the loan is "non-recourse" (i.e. collection rights are limited to taking ownership of the collateral), it isn't important to even know the address of the borrower, and no lawsuits are necessary for the lending pawn shop owner to be made whole if the loan is not repaid.

The down side of running a pawn shop is that the owner needs to have considerable skill to value the collateral at a price sufficient to repay the loan together with a fair share of the administrative expenses of the operation on a case by case basis, for the very modest profit margin associated with a typical pawn shop.

Most people who are skilled enough to value tangible personal property accurately enough to make money running a pawn ship are also skilled enough to do other things that pay better.

Late Charge: Any payment not remunerated within 10 days of its due date shall be subject to a belatedly charge of 5 percent (%) of the payment, not to exceed $500 for any such late installment.

Late charges are considered in the maximum interest rate calculation, so you need a much longer term loan and a much lower interest rate for this to be legally permissible.

Collection fees: If this note is placed with a legal representative for collection, then Borrower agrees to pay an attorney's fee of ten percent (10%) of the voluntary balance. This fee will be added to the unpaid balance of the loan.

Not sure what is meant by the "voluntary balance." It isn't inherently improper to include the costs of collection in a loan agreement, and indeed, I think that this may be the default rule of law in British Columbia without any contractual term under loser pays rules of civil procedure.

But, a court can decline to award more than the "reasonable" legal fees incurred to collect a debt, and it is not at all clear that even the minimal amount of legal fees one could incur to collect a debt would be reasonable to collect a loan of $100 and interest.

Likewise, while there are "hard money loans" (i.e. loans secured only by collateral and no personal obligation to pay that can be enforced against an individual's assets in court), where it is customary for the legal costs of drafting the loan documents to be paid by the borrower rather than the lender, for the most part, this simply makes no sense, because even 12 minutes of legal time (0.2 hours in the typical legal billing format) is an excessive amount to charge for a $100 loan for a five day period of time. This would typically be $50-$60 or more. It would probably be treated as an interest charge and hence would be illegal in British Columbia.

Would a term like "if the lender needs to resort to legal action to enforce a term of this agreement, the borrow will reimburse him for all related expenses and his time" be enforceable?

Reimbursement for out of pocket court filing fees and any photocopying costs and process server costs is likely to be enforceable. Reimbursement for the lenders own time to enforce the loan in the event of a default is probably not enforceable in the case of a $100 loan, even at minimum wage.

Making small loans has historically been a marginal economic sector for precisely this reason. Even if the default rate is low, the administrative costs associated with making and enforcing (in the event of defaults) a small loan and the administrative costs associated with making and enforcing these promise for a much larger loan are similar. But the dollar amount of interest generated by a small loan is much smaller relative to the administrative costs involved than the interest on a large loan.

Credit card companies and similar lenders make small loans affordable by automating the lending process, screening borrowers based upon credit ratings, making many loans each month to the same borrower, and making loans to many, many borrowers to spread the risk out. But making small loans on a one-off basis is not a profitable venture.

Business models that charge enough to be profitable with small loans, like payday lenders and car title lenders in the United States, usually have some sort of collateral or de facto collateral (like a post-dated check), and tend to be shut down by regulators because their interest rates typically need to be on the order of 150%-400% per annum to make a profit, due to high administrative costs involved in making small loans relative to the amount of the loan. But interest rates this high are considered exploitive and are illegal.

Another business model, which essentially describes the business model in the question except for the enforcement method, is called "loan sharking". The main difference between legitimate or almost legitimate small loan lending and loan sharking, is that loan sharks enforce their loans by having organized crime enforcers beat up people who don't pay, rather than using lawsuits to deal with loan defaults. This is, of course, completely illegal and a serious crime.

2
  • Do the laws applying to loans automatically apply whenever a party is given money with the promise to pay the lender back? In other words, when is something considered a loan? Nov 22, 2022 at 22:26
  • 3
    @CoriolisForceFighter Pretty much. Giving someone money in exchange for a promise to repay it is the usual definition of a loan.
    – ohwilleke
    Nov 22, 2022 at 23:04
2

The first thing to protect yourself would be a written loan contract. If it states that they received a loan and agreed to pay it back by some date, that's 99% of the job done.

All these "mitigation" terms are of limited value. If the borrower doesn't pay back, you have all kinds of legal measures that you can take without them being mentioned in the contract. I would more be afraid that for example these terms that they might have to pay another 10 percent of the loan might be not legal.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .