Financial Services Quarterly
Extremely high rates of interest acceptable for short-term loans
The District Court has decided that a lender making short-term loans was justified in charging interest at 520% per annum.
In this case1, the lender specialised in loans designed to cover borrowers for cashflow shortfalls between pay days. Interest was presented in money rather than percentage terms – for every $100 loaned, $10 was payable per week in interest. This amounted to 520% per annum.
The issue for consideration by the court was whether the lender could recover such a high rate of interest on default.
Finding in favour of the lender, the court noted that it was necessary to bear in mind that the lender's business model was to make short-term, relatively low value, loans so that the rate of interest had to be high enough to recover not just the level of risk, but also the administration costs involved in processing the loans. Such rates were found to be justifiable only in the short term.
1 My Pay Day Loan v Lepou [2009] DCR 890
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