Anatocism consists of the collection of interest on the default interest in case of non-payment of a loan. Therefore, it is a doubly accessory payment obligation.
In this way, when the debtor stops paying, the amount of interest itself will be added to the capital due, hence it is an accessory obligation of another. Thus, the new financial cost will be calculated on both amounts, hence it is double. As we can see, it is very close to usury and therefore, the legislation of many countries prohibits it, at least from a commercial point of view.
Anatocism and interests
It is important that we raise a difference between the interest on a loan and the arrears. The latter are the ones that concern us today. Let's see what each one means:
- The interest on a loan is, from the borrower's point of view, a financial cost. That is, they reflect what the money they lend us costs us. From the lender's point of view, it would be the price at which he "sells" his money. Therefore, it would be your profit.
- However, default interest occurs when there is a default. If the debtor does not meet the loan within the established term, then these appear and are usually higher, as a percentage of the debt, than the normal ones. These are established in the loan contract and must be detailed.
The problem comes from compound interest
Compound interest has been a great ally for the saver, but it is a nightmare for the debtor. In this way, if we owe money to the bank and it has included one of these clauses, we will have a problem. As we will see in the example, the debt can be considerable if we add capitalized arrears to the usual interests.
Your relationship with abusive mortgage clauses
Mortgages have given much to speak for the possible abuses that can be committed through their contracts. From the floor clauses to the indices considered abusive, such as the IRPH in Spain. All this has ended up being, on too many occasions, a headache for the creditor. High court rulings in favor of the debtor have been the driving force behind this situation.
Pacts based on anatocism, which allow the collection of interest on interest, have been considered usury in various judgments. Spain has been one of the pioneers, with some such as that of the Alicante Provincial Court in 2014. In this way, it was considered an abusive clause when it was imposed on a mortgage loan and, therefore, it was null for all purposes.
Example of anatocism
Let's imagine a case, of course unreal, of a 10-year mortgage, at 5% interest, 15% interest on default and for an amount of € 100,000. In the figure we can see that the default interest, when calculated only on the principal, adds up to a total of 82,500 currency units (CU).
However, the default interest calculated on principal and accrued interest, anatocism, amounts to CU86,625. total. The difference between the two is CU4,125. That doesn't sound like much ... But let's imagine an average mortgage of CU200,000, with a duration of 30 years and interest on arrears of 25%. It can be a considerable amount.
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