This article presents issues related to interest and interest rates in loan contracts, excluding credit contracts (which pertain to loan agreements involving credit institutions and individual or organizational customers) (“**Loan Agreements**”).

**A. COMMON TYPES OF INTEREST IN LOAN CONTRACTS**

For an Interest-Bearing Loan Agreement, upon maturity, in addition to the initial loan amount **(“Principal**“), the debtor is also obligated to remit an additional sum referred to as the interest on the outstanding Principal (“**Loan ****Interest**“).

In the event of payment due and the debtor failing to fully settle the Principal and Loan Interest, the creditor reserves the right to require the debtor to pay an additional amount of interest on the overdue Principal (“**Interest on Overdue Principal**“) and an amount of interest on the overdue Loan Interest (“**Interest ****on Overdue Interest**“) corresponding to the number of days overdue.

In interest-free Loan Agreements, when the due date arrives, the debtor is only required to repay the Principal (the loan sum or stipulated payable amount) to the creditor. However, if the payment is delayed, the debtor is obligated to cover Interest on Overdue Principal, proportionate to the days the payment is overdue, payable to the creditor.

Therefore, three common interest amounts are often encountered in Loan Agreements, including: i) Loan Interest; ii) Interest on Overdue Principal; and iii) Interest on Overdue Interest.

**B. INTEREST RATE AND CALCULATION OF INTEREST AMOUNTS**

__For Loan Interest__

According to the law, if the parties mutually agree on an interest rate for the loan, this rate must not surpass 20% annually. Should the parties agree upon interest payment without specifying the interest rate, leading to a dispute regarding the rate, the applicable loan interest rate will be 10% annually.

Hence, the formula for calculating Loan Interest stands as follows:

In instances where the parties have explicitly defined the loan interest rate:

**Loan Interest = Principal x Negotiable**** interest rate**** (not**** exceeding 20%/year****) x **** Loan period**

In case the parties agree on the payment of interest but do not define the loan interest rate:

**Loan Interest = Pri****n****cipal x 10%/year x Loan**** period**

__For Interest on Overdue Principal__

In cases where the parties do not reach an accord regarding the rate for Interest on Overdue Principal, the rate defaults to 10% annually.

Alternatively, by mutual agreement, the parties may choose to apply the overdue interest rate based on either: (i) the mutually agreed-upon overdue interest rate, provided it does not surpass 20% annually; or (ii) an overdue interest rate equivalent to 150% of the loan interest rate settled upon by the parties, as long as it remains below 30% annually.

Accordingly, the formula for computing Interest on Overdue Principal unfolds as follows:

In case the Loan Agreement does not contain an agreement on the overdue interest rate on the overdue principal:

**Interest on Principal = Unpaid Principal x 10%/year x Late Principal Repayment Period **

In case the Loan Agreement applies an overdue interest rate as agreed upon by the parties:

**Interest on Principal = Unpaid Principal x**** Nogotiable**** Interest Rate (not exceeding 20%/year) x Delay in Principal Repayment **

In case the Loan Agreement applies an overdue interest rate equal to 150% of the interest rate agreed upon by the parties:

**Interest on Principal = Unpaid Principal x 150% of the agreed interest rate (not exceeding 30%/year) x Delayed Principal Repayment Period **

__For Interest on Overdue Interest__

Typically, the rate of 10% annually is applied to Interest on Overdue Interest.

Consequently, the formula for determining Interest on Overdue Interest reads as follows:

**Interest on ****O****verdue ****I****nterest = Unpaid interest x 10%/year x Late payment period**

**C. EXAMPLES**

1. On 01 January 2020, Mr. A borrowed VND 100 million from Mr. B at an interest rate of 10%/year for a year Suppose Mr. B fails to repay the debt to Mr. A overdue. In that case, he must bear the overdue interest rate calculated on the principal debt of 20%/year, alongside a 10% annual overdue interest rate based on the loan interest. As of 1 January 2022, there is a 1-year debt due but Mr. A has yet to pay Mr. B. The amounts Mr. A shall pay Mr. B as of 01 January 2022 include:

– Principal = VND 100 million;

– Loan Interest = 100 million x 10%/year x 01 year = 10 million VND;

– Interest on Overdue Principal:

#1: The parties apply overdue interest rates agreed upon by the parties

Interest on Overdue Principal = VND 100 million x 20%/year x 01 year = VND 20 million; or

#2: The parties apply an overdue interest rate equal to 150% of the loan interest rate agreed upon by the parties

Interest on Overdue Principal = VND 100 million x 150% x 10%/year x 01 year = VND 15 million

– Interest on Overdue Interest = VND 10 million x 10%/year x 01 year = VND 2 million.

2. On 01 January 2020, Mr. A borrowed VND 100 million from Mr. B at an interest rate of 15%/year for a period of 01 year. Suppose Mr. B fails to repay the debt to Mr. A overdue. In that case, he must bear the overdue interest rate calculated on the principal debt of 20%/year, alongside a 10% annual overdue interest rate based on the loan interest. As of January 1, 2022, there is a 1-year debt due but Mr. A has yet to pay Mr. B. The amounts Mr. A shall pay Mr. B as of 01 January 2022 include:

– Principal = VND 100 million;

– Loan Interest = 100 million x 10%/year x 01 year = 10 million VND;

– Interest on Overdue Principal:

#1: Application of overdue interest rates agreed upon by the parties

Interest on Overdue Principal = VND 100 million x 20%/year x 01 year = VND 20 million; or

#2: Apply an overdue interest rate equal to 150% of the loan interest rate agreed upon by the parties

Interest on Overdue Principal = VND 100 million x 150% x 15% / year x 01 year = VND 22.5 million.

– Interest on Overdue Interest = VND 10 million x 10%/year x 01 year = VND 2 million.

*Note: **The content presented above is for reference only. Subject to each specific case from time to time, the above content may no longer be relevant. For further advice, please contact LMP Lawyers.*