Interest (Legal Term): Definition, Significance, and Legal Classification
The term “Interest” originates from English and is used in numerous legal contexts. In German, it essentially corresponds to the term “Zinsen” (interest). In a broader sense, “Interest” refers to the entitlement to remuneration for the use of capital or monetary services that is based on a specific duration. The following article explains the legal importance of “Interest” in various areas of law, highlights relevant regulations, and distinguishes between key forms and legal consequences of the term.
Definition and Distinction
Etymology and Definition
In Anglo-American law, “Interest” primarily means interest, i.e., the payment for the provision of money. Additionally, in legal texts, “Interest” may sometimes be understood more broadly as “interest” (in the sense of an economic or legal concern). This article focuses mainly on “Interest” as a claim to interest payments, as well as its legal foundations, functions, and types.
Distinction from Similar Terms
- Principal: The term “Principal” refers, in contrast to “Interest,” to the original capital sum to which interest accrues.
- Benefit or Profit: While “Interest” is a targeted and contractually or legally determined payment, “Benefit” or “Profit” generally refers to an economic advantage not directly tied to the provision of capital.
Legal Foundations of Interest / Interest
Contractual Foundations
Under civil law, the entitlement to interest arises in particular in loan agreements. Under German law, the right to interest is regulated in section 488 paragraph 1 sentence 2 of the German Civil Code (BGB). Internationally, comparable rules can be found, such as in the Principles of European Contract Law or English Law of Contract.
Statutory Interest
Many statutory provisions provide for the accrual of interest on monetary claims. Examples:
- Default Interest: According to Art. 288 of EU Directive 2011/7/EU and § 288 BGB, in the event of payment default, in addition to the main claim, an interest claim on the outstanding amount is owed.
- Judgment Interest: According to § 291 BGB, the creditor is entitled to interest from the time of pendency if there is an enforceable title.
Public Law Sector
Tax and administrative law also contain provisions regarding interest (e.g., section 233a of the German Fiscal Code for tax interest).
Types of Interest (“Interest Types”)
Term-Related Interest (“Simple Interest” vs. “Compound Interest”)
- Simple Interest (simple interest): Interest is calculated solely on the original sum (“Principal”).
- Compound Interest (compound interest): Interest is calculated not only on the principal but also on accrued interest that has already fallen due.
Fixed and Variable Interest
- Fixed Interest Rate: A fixed interest rate agreed upon for a specific period in the contract.
- Variable Interest Rate: In lending practice, often tied to reference rates (e.g., EURIBOR or LIBOR) and adjustable during the term.
Default Interest
In the event of payment default, the debtor owes so-called “Default Interest.” The amount and calculation of this interest are precisely regulated by law. The rules vary, for example, between German, English, American and international private law.
Legal Effects and Function of Interest
Compensation for Loss of Time Value
Interest mainly compensates the creditor for the loss of use of their claim and covers possible inflation and loss risks.
Instrument to Secure Performance
In case of delay or late payment, the interest claim serves as a means of pressure to ensure timely payment of the debt.
Tax Treatment
Interest income is generally considered taxable income and subject to specific tax regulations, for example with regard to capital gains tax.
Special Features in International Law
International Payment Transactions
In cross-border legal transactions, the amount and enforceability of interest claims are often subject to special contractual agreements or international treaties (including the CISG/UN Convention on Contracts for the International Sale of Goods, Art. 78 CISG).
Choice of Law and Jurisdiction Agreements
Contracts with an international dimension frequently expressly regulate the applicable interest rate, as otherwise the relevant national law applies. Interest regulations from English law, US law or other national legal systems are often applied.
Focal Points in Selected Areas of Law
Banking and Capital Market Law
Interest is calculated in banking law for the granting of loans, on savings deposits, or during securities transactions. Statutory requirements and restrictions here are particularly strict.
Insolvency Law
After commencement of insolvency proceedings, claims to interest are usually only considered as insolvency claims. Subordination rules mean that interest claims, under certain conditions, may no longer be asserted at all or only to a limited extent.
Criminal Law and Interest
In criminal law, the term “interest” rarely appears but may be relevant in the context of the recovery of interest gains or asset confiscation.
Case Law and Interpretation
Courts have clarified the term interest, taking into account contractual freedom, expediency, and fairness in numerous decisions. The precise determination and justification of the interest-bearing claim is made case by case through interpretation, particularly involving general terms and conditions or international commercial customs.
Summary
In a legal context, the term interest mainly encompasses the entitlement to interest and serves as an essential instrument for the financial compensation and remuneration of monetary claims. The legal classification of claims to interest is multifaceted and depends on the particular area of law as well as national or international sources of law. Proper handling of interest requires careful consideration of the applicable statutory and contractual bases, especially in international trade, banking, and law of obligations.
Frequently Asked Questions
In which cases does a statutory interest claim arise under German law?
A statutory interest claim arises under German law in particular when a debtor is in default with a monetary debt (§ 288 BGB). The prerequisite is usually that the amount due is payable and the creditor has issued a reminder, or a reminder is exceptionally not required (for example, where payment is determined by a specific date). Even without an express agreement between the parties, statutory default interest applies. Beyond that, there are special provisions, e.g., for claims to recover payments not owed (§ 818 para. 1, § 819 para. 1 BGB), statutes of limitations (§ 291 BGB), or in commercial transactions (§ 352, § 353 HGB). The amount of statutory interest varies depending on whether a consumer transaction or a business transaction between merchants is involved.
What is the amount of statutory default interest and how is it calculated?
Statutory default interest is regulated in § 288 BGB. For transactions in which no consumer is involved (“business transactions”), the rate is nine percentage points above the relevant base rate in accordance with § 247 BGB. Where at least one consumer is involved, the rate is five percentage points above the base rate. The base rate is set by the Deutsche Bundesbank on 1 January and 1 July each year and published in the Federal Gazette. Calculation is prorated from the entry into default until full payment, often calculated per day. Commercial law has separate rules for certain transactions (e.g., § 353 HGB – interest on due claims between merchants).
Are interest earnings subject to special legal treatment in the context of taxation or insolvency?
Yes, interest income is generally treated for tax purposes as income from capital assets (§ 20 EStG) and is subject to withholding tax, unless personal allowances or other exemptions apply. In insolvency law, claims to interest are treated differently: After the opening of insolvency proceedings, new interest claims against the insolvency estate can generally no longer be asserted (§ 38, § 39 InsO); these qualify as subordinated claims and are satisfied only if, after all other liabilities are settled, assets remain.
What formal requirements apply to contractual agreements on interest?
Interest agreements are in principle not subject to any formal requirements; they may be concluded orally, in writing or by implied conduct. In some special cases, however, formal requirements may apply, for example for consumer loan agreements (§ 492 BGB), which require a written record. If formal requirements are not met, the interest agreement may be invalid and the statutory interest rate applies. Moreover, interest agreements are subject to judicial review of their content, particularly with regard to the appropriateness of the interest rate.
Is there a statutory interest cap (“usurious interest”) in German law?
Yes, under § 138 BGB, interest agreements are immoral and thus void if the agreed interest rate bears a conspicuous disproportion to the service rendered and the creditor has an immoral motive (for example, exploiting a state of need). Although there is no fixed interest rate cap, courts generally regard rates that are more than double the customary market rate or more than 12 percentage points above the base rate as usurious. In such cases, the interest agreement is entirely void and instead only the statutory interest rate can be claimed.
How are interest claims asserted in legal proceedings?
Interest claims can be specified in the statement of claim for certain interest rates (e.g., 5 percentage points above the base rate as of a specified date). It is advisable to state both the main claim and the calculation basis and the exact period for interest in the claim and its reasoning. The court will then examine whether the legal requirements for the award of interest are met and the exact amount. Interest awarded by judgment may also be granted retroactively for the period since the occurrence of default.
Can interest already paid be reclaimed?
Interest already paid can be reclaimed if it turns out that it was paid without a valid legal basis, for instance, because the interest agreement was immoral, suffered from a formal defect, or the underlying contract is void. The basis for this is § 812 BGB (claim for restitution due to unjust enrichment). A reclaim is excluded if there are defenses against the claim, for example if there is no object of enrichment or if the recipient was acting in good faith and has already disposed of the funds. Limitation periods (§ 195, § 199 BGB) must also be observed.
