New Interest Rules for Loans in Thailand

To help ease the burden of repaying loans in Thailand, the Thai government issued an emergency decree (link in Thai) (Decree) amending the Thai Civil and Commercial Code (CCC) regarding interest rules for loans.

From April 11, 2021, interest rates for certain financial agreements will change under Sections 7 and 224 of the CCC as follows:

STATUTORY INTEREST RATE DECREASED

Under the amended CCC Section 7, the statutory interest rate drops from 7.5% to 3% per annum. The Decree also sets out that the Ministry of Finance should review this rate every three years and adjust it according to current deposit and loan interest rates offered by Thai commercial banks.

Please note that this only applies if an agreement does not specify an interest rate in its clauses. If, however, there is a specified interest rate, it cannot be more than 15%. So, even if a signed agreement stipulates an interest rate over 15%, only 15% interest can legally apply. Nevertheless, financial institutions are subject to different laws where higher interest rates on agreements with credit card companies and other debts still apply.

STATUTORY DEFAULT INTEREST RATE DECREASED

The Decree amends CCC Section 224 regarding interest on debt defaults. Previously, the rate on loan defaults was 7.5%. The new CCC Section 224 sets the interest rate at 2% plus the rate set in Section 7 for a total of 5%. Furthermore, the section states that the default interest rate applies only to the principal and not to the interest to be paid on the principal – to be clear, interest may not be compounded (e.g. charging interest on interest).

There is potential relief for creditors in the amended law stating that they can demand higher rates. However, they must prove “legitimate grounds”, which is not specified by the law.

DEFAULT INTEREST APPLIES ONLY TO UNPAID PRINCIPAL

A new CCC Section 224/1 now details on what parts of principal a creditor can apply default interest. Previously, creditors were able to charge the default interest rate on both the amount in default as well as the unpaid principal (meaning not yet due or in default). Section 224/1 now prohibits default interest being applied on unpaid principal. So, only that portion of the principle that is in default qualifies for this interest. Also, the law voids any clause in any agreement that applies a default interest rate to unpaid principal to take a stand against loan sharks and predatory lending practices.

It bears noting that Thai law generally does not allow compound interest on loans, except under specific criteria. For example, commercial banks may charge compound interest on most of its accounts and transactions.

OTHER POINTS OF INTEREST

As mentioned above, there are different interest rates for other types of debt. Nevertheless, the Bank of Thailand has recently done its part to help debtors by lowering various other interest rates. For example, credit card interest rates cannot be higher than 16% (down from 18%), and personal loan interest rates from commercial banks are now a maximum 25%.

GPS LEGAL KNOWS CONTRACTS AND LOANS

These changes apply as of April 11, 2021 to calculations and payments retroactively as well as prospectively. This means that any new agreement must comply as well as any calculations for interest or default for existing agreements signed prior to that date. But as outlined in this article, there are other types of financial transactions where different rates and possible rules apply.

If you are unsure about the repayment terms for an agreement you entered or are about to enter and would like to ensure the terms are legally compliant, contact GPS Legal today for a free 30-minute initial consultation.