What is the highest interest rate you can charge on a personal loan?
When lending money, even to friends and family, it is important to sign a proper loan agreement. Often informal loans result in fallings out, unrecoverable funds and occasionally, costly litigation. Using a professionally drafted loan agreement is always the safest choice, but, it can be difficult to choose an appropriate rate of interest. Many clients ask us, what is the highest interest rate that you can charge on a personal loan?
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There are very few caps on rates of interest, or on total interest charged on debt or late payments under commercial or consumer agreements:
- Statutory Interest Rate is charged at 8% plus the Bank of England base rate. It applies to commercial agreements where no rate of interest has been given.
- The statutory interest rate does not apply to consumer credit agreements, mortgage agreements or agreements for pledge, charge or security.
- Any amount of interest can be charged on a consumer credit agreement, but, the lender must clearly communicate to the borrower, both the APR (annual percentage rate) and default interest payable, before the agreement is made.
- Consumer agreements are capped at no more than 0.8% interest per day.
- The total interest payable on a consumer agreement cannot exceed 100% of the loan amount.
Is my loan agreement affected by the Consumer Credit Act?
Yes | No |
Commercial Agreement | Non-Commercial Agreement |
Business loan up to £25,000, or, Not for business purposes | Business loan over £25,000 |
Over £30 | £30 or less |
Is your loan a 'commercial agreement'? - Generally, if it is the lender's business to make loans, then any loan made by the lender will be considered to be a commercial agreement, and the Consumer Credit Act will apply.
The Consumer Credit Act (CCA) is a set of regulations which were first brought into effect in 1974, to protect the borrower. Most people will recall the name from their credit card agreement, however, it also grants borrowers certain protections under any loan or hire agreement. This means that you must be careful to use the correct type of loan agreement and in certain circumstances, it means that the borrower will need to seek independent legal advice regarding the loan.
The CCA Regulates
- The information that must be provided to the borrower, by the lender, before the agreement is made
- The content and form of the credit agreement itself
- The method used for calculating API (annual percentage rates of interest)
- What will happen if the borrower defaults (misses a repayment), settles the loan early, or the loan agreement is terminated.
- Advertising of credit
- Credit card purchases between £100 and £30,000 have additional protections as set out in Section 75.
Frequently Asked Questions
Yes, if you are lending someone money to buy their home, you can link the interest to a percentage of the sale price, when they sell the property. Subject to CCA Adherence.
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