Loan Agreement Default Interest Rates: How Much Is Too Much?

It would be a strange loan agreement indeed if there was no provision for the payment of interest by the borrower on the amount outstanding, and this rate of interest will generally increase if the borrower defaults on a payment.

But, can a lender impose any default interest rate they wish? The short answer is no. Although a higher interest rate is acceptable where there has been a default; justified by the increased credit risk taken on by the lender, an unusually high default interest rate could be deemed a penalty and actually be unenforceable by the lender as this recent case shows.

The facts

In brief, the borrower (Ahuja) had bought a property from the lender (Victorygame), which was partly funded by a loan from Victorygame. Ahujua subsequently defaulted on a payment under this loan, alleging misrepresentation.