Lending is a common financing method in daily life. To protect their legitimate rights, creditors typically choose to establish loan contracts with debtors. A loan contract is one where a borrower borrows money from a lender, agrees to repay the loan at maturity, and pays interest. Compared to the Contract Law, the Civil Code introduces significant revisions to loan contracts, mainly reflected in Articles 679 and 680. The author has summarized these changes into the following three aspects.

I. Establishment of Loan Contracts Between Natural Persons

The main distinction between loan contracts between natural persons and those involving financial institutions as borrowers is that the latter are consensual contracts, while loan contracts between natural persons are real contracts. Real contracts, also known as material contracts, require not only mutual agreement but also the delivery of the subject matter or other real payments for the contract to be established.

Thus, Article 210 of the Contract Law, which stated that loan contracts between natural persons become effective upon the lender providing the loan, was inaccurate as it conflated the concepts of contract establishment and contract effectiveness, which are different in nature and scope. Article 679 of the Civil Code corrects this by stating, “Loan contracts between natural persons are established when the lender provides the loan.” Therefore, regardless of whether the loan contract between natural persons is verbal or written, the loan is considered established when the loan is provided, not when it takes effect.

II. Prohibition of Usury

Prior to the Civil Code, regulations against usury were only reflected in departmental rules. Article 680 of the Civil Code introduces a specific prohibition on usury, stating, “Usury is prohibited, and loan interest rates must not violate state regulations,” providing a clear legal basis against usury. Regarding loan interest rates, different rules apply to private lending and financial institution loans in China.

(a) Interest Rate Regulations for Private Lending

The latest revision to the Supreme People’s Court’s “Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases” introduced a significant adjustment to the upper limit on private lending interest rates. For cases after August 20, 2020, the judicial protection upper limit for private lending interest rates is set at four times the loan prime rate (LPR) for a one-year loan. For example, using the one-year LPR of 3.85% as of July 20, 2021, the judicial protection cap for private lending interest rates would be 15.4%. This rule changes the “two-line three-zone” interest rate rule for private lending in effect since September 1, 2015. However, whether financial institution loan interest rates are bound by four times the LPR remains a matter of significant debate in practice.

(b) Interest Rate Regulations for Financial Institution Loans

The Supreme People’s Court’s “Several Opinions on Further Strengthening Financial Trial Work,” issued on August 4, 2017, states: “If the borrower of a financial loan contract requests a reduction of interest, compound interest, penalty interest, liquidated damages, and other charges exceeding an annual rate of 24% on the grounds that they significantly deviate from actual circumstances, this request should be supported.” For financial institution loans, the judicial protection upper limit for interest rates is therefore set at 24% per year.

In response to disputes arising from the new private lending regulations’ fourfold LPR cap, the Supreme People’s Court Judicial Case Research Institute recently published an article titled “Supreme Court: Judicial Protection Upper Limit for Financial Institution Loan Interest Rates is 24% Per Year,” using case number (2020) SPC Min Zong 1323 as an example. The reasoning in this judgment clarified that the applicable upper limit for financial institution loan interest rates remains the 24% per annum set out in the Supreme People’s Court’s 2017 opinion and is not limited by four times the LPR. This ruling provides a clear directive on the issue of applicable loan interest rates for financial institutions."

III. New Changes to Provisions Regarding Loan Interest

(a) No Interest Agreed in Loan Contract

Previously, Article 211 of the "Contract Law" stipulated: "If a loan contract between natural persons does not specify interest or is unclear regarding interest payment, it is considered interest-free." The "Civil Code" revised this provision, removing distinctions based on whether the parties are individuals or entities or whether the lender is a financial institution. As long as the loan contract lacks a specific interest agreement or is unclear on interest payment, it is considered interest-free. In practice, however, loans from financial institutions typically include clear interest terms.

(b) Unclear Agreement on Interest Rate Between Borrower and Lender

According to Article 680, Paragraph 3, of the "Civil Code," if a loan contract lacks a clear agreement on interest payment and the parties cannot reach a supplementary agreement, the interest is determined by local or customary trading practices, transaction habits, market rates, and other factors. In loans between natural persons, it is regarded as interest-free. Thus, if the interest rate is unclear in a loan contract, the determination of interest depends on the identity of the parties. If both parties are natural persons, the loan remains interest-free. If one or both parties are entities (regardless of whether they are financial institutions) and no supplementary agreement on interest can be reached, the interest is determined based on local practices, transaction habits, or market rates. In these cases, the court has a degree of discretion.

Practical Tip

In determining "unclear interest agreements," practical distinction should be made between superficial and substantive ambiguity. "Superficial ambiguity" refers to scenarios where the interest term appears unclear, requiring contract interpretation or factual investigation to clarify. In judicial practice, if ambiguity arises from vague terms, it should first be treated as superficial ambiguity, allowing for contract interpretation or factual investigation to determine true intent. If true intent remains indeterminate, it qualifies as substantive ambiguity. The "unclear agreement" referred to in Article 680, Paragraph 3, of the "Civil Code" should be interpreted as a substantively ambiguous interest term.