Upon the conclusion of a consumer loan agreement, the person taking the loan becomes obliged to pay principal and interest on the due dates determined. Compliance with that schedule is essential given the nature of the agreement. Where payments fall into arrears, the lender may place the borrower in default and claim both performance of the obligation itself and interest for the delay.
The possibility of accelerating the whole of the debt and the conditions required for it are regulated in Article 28 of the Consumer Protection Act No. 6502. The interest that the consumer will bear in the event of default is dealt with in the second and third paragraphs of Article 18 of the Regulation on Consumer Loan Agreements.
Below we examine the conditions of acceleration, the time that passes before enforcement proceedings, the calculation and the upper limit of default interest, the prohibition on additional charges where the debt is accelerated, the prohibition on compound interest and the scope of the guarantor’s liability.
Acceleration of the Entire Loan Debt
The circumstances in which the whole of the debt becomes claimable, and the conditions for this, are set out in Article 28 of the Consumer Protection Act No. 6502. Where those conditions are met together, the bank may demand performance of the whole of the remaining debt.
Consumer Protection Act No. 6502 Art. 28(1)
"In fixed-term loan agreements, where the consumer falls into default in paying the instalments, if the lender has reserved the right to demand performance of the whole of the debt, that right may be exercised only where the lender has performed all of its obligations and the consumer has fallen into default in paying at least two consecutive instalments. In order for the lender to exercise this right, it is compulsory to give the consumer a period of at least thirty days and to issue a notice of acceleration."
Proceeding from that provision, the conditions required for acceleration may be gathered together as follows:
- The lender must have performed the whole of its obligations arising from the agreement.
- There must be a fixed-term loan agreement in place, and the power to accelerate the whole of the debt in the event of non-payment of the instalments must have been reserved in the agreement.
- The decisive element here is that the consumer has fallen into default in paying at least two consecutive instalments.
- The lender must send the consumer a notice of acceleration and allow a payment period of at least thirty days. It is compulsory that this notice;
- sets out the unpaid amount, the rate of default interest to be applied and any other costs,
- is conveyed in writing or by another means qualifying as a durable medium,
- states clearly that the whole of the remaining debt will be accelerated if payment is not made.
The Time Available to the Consumer Before Enforcement Proceedings
Where all of the conditions in Article 18 of the Regulation and Article 28 of the Act have been met, on the expiry of the thirty-day period the consumer who has not paid the two instalments and the default interest falls into default; the whole of the remaining instalments is accelerated.
Even though the initiative lies entirely with the bank where two consecutive instalments go unpaid, a period of at least 90 days is available to the consumer before enforcement proceedings can be commenced.
Default Interest Applicable in the Event of Delay
The default interest that the lending institution may claim where default occurs in the payment of the loan debt is regulated in Article 18 of the Regulation on Consumer Loan Agreements.
Regulation on Consumer Loan Agreements Art. 18(2)
"(2) In the event of default or late payment, default interest may not be collected from the consumer at a rate higher than thirty per cent above the contractual interest rate stipulated in the agreement. Otherwise, the lender is obliged to pay the consumer the amount collected in excess together with interest calculated at thirty per cent above the contractual interest rate stipulated in the agreement for the period between the date on which the amount collected in excess was collected and the date on which it is actually repaid to the consumer."
The second paragraph introduces a protection in the consumer’s favour. The first sentence of the paragraph sets a ceiling on the default interest to be applied in the event of default or late payment, and does not permit the contractual interest rate in the agreement to be exceeded by more than thirty per cent. The details of the debate on unfair terms are dealt with in our note entitled Unfair Terms in Consumer Contracts.
The remainder of the paragraph provides for a sanction against a lender that does not observe this limit: the amount collected in excess is to be returned, and in addition interest calculated at thirty per cent above the contractual interest rate is to be paid to the consumer for the period between the date on which that amount was collected and the date on which it is actually repaid to the consumer. The provision aims to protect the consumer by imposing a heavy financial liability on the lender. Where banks agree among themselves to set interest rates to the detriment of the consumer, a liability in damages also arises; that subject is examined in our note entitled Infringement of the Competition Act and Cartel Damages.
The amount taken as the basis of the calculation is the instalment that has not been paid or has been paid late; the period is determined according to the number of days of delay. The date on which the debtor made payment is taken into account in calculating the default interest that may be claimed.
The Prohibition on Additional Charges Where the Debt Is Accelerated
The Act imposes a clear limitation at this point:
Consumer Protection Act No. 6502 Art. 28(2)
"Interest, commission and similar costs are not taken into account in calculating the accelerated instalments."
The Regulation contains a provision to the same effect:
Regulation on Consumer Loan Agreements Art. 18(1)
"Interest and charges are not taken into account in calculating the accelerated instalments."
Accordingly, a lender relying on an acceleration clause cannot pass on to the consumer items such as interest, commission and the like in respect of the instalments it has accelerated. The rationale of the provision is clear: a consumer who has fallen into default will already bear default interest on the instalments not paid; the addition on top of that of interest and costs arising from the agreement is what the provision seeks to prevent.
How Is Default Interest Calculated?
Default interest may be applied at a rate no more than 30% above the loan interest rate in force. To put it concretely, on a loan taken at monthly interest of 1%, the default interest that may be passed on cannot exceed a monthly rate of 1.30%.
That said, the total interest burden of the loan rises in practice to a level of approximately 1.5 times. A consumer who takes a loan at 1% interest has additional interest of 1.30% passed on to him; in uses other than housing loans, KKDF (15%) and BSMV (5%) are also added to that amount.
Can Compound Interest Be Applied to Late Payments?
The Act answers this question in the negative:
Consumer Protection Act No. 6502 Art. 4(7)
"Compound interest is not applied in consumer transactions, including in the event of default."
Compound interest has not been given a place in loan transactions in our country, and default interest may be run only on the principal. It is therefore not legally possible for interest to be charged on interest.
Holding the Guarantor Liable for Default
A person who stands as guarantor for the consumer in the loan agreement is treated as having given a security of payment in respect of debts that go unpaid. Where the consumer fails to pay the debt and is placed in default, the possibility of claiming the whole of the debt from the guarantor depends on the guarantor also being informed of the notice sent to the consumer pursuant to the first paragraph of Article 28 of the Act, and on thirty days having passed since that notice.
Once the whole of the debt has been accelerated and default has occurred in respect of that debt, the situation must be separately notified to the guarantor pursuant to Article 7 of the Turkish Commercial Code No. 6102. If that notification is not made, the guarantor cannot be held liable for the default interest running on the whole of the debt.
Turkish Commercial Code No. 6102 Art. 7(1)
"Where two or more persons jointly assume a debt towards another person on account of a transaction of a commercial character for only one or for all of them, they are jointly and severally liable unless otherwise provided in the law or in the agreement. However, default interest may not be run against the guarantor or guarantors without notice being given that the undertaking or the payment has not been made or performed."
Turkish Code of Obligations No. 6098 Art. 590(3)
"Where the maturity of the principal debt depends on a prior notice containing a period being given by the creditor or the debtor, that period, as regards the obligation of guarantee, begins to run on the date on which the notice is given to the guarantor."
Accordingly, even where the guarantor has been informed of the notice containing a period sent to the principal debtor pursuant to Article 590 of the Turkish Code of Obligations No. 6098, and his attention has separately been drawn to the fact that default will arise at the end of the period allowed, the obligation to give notice within the scope of Article 7 of the Turkish Commercial Code No. 6102 does not disappear once the whole of the debt has been accelerated and default has occurred.
Although the text of Article 7 referred to speaks only of default interest, the provision should be construed broadly. It is sound to conclude that, so long as the guarantor is not notified that default has arisen in respect of the whole of the debt, the guarantor cannot be held liable for the consequences of the default or for the losses arising from the delay.
The Independent Legal Assessment
In files where loan instalments have fallen into arrears, the argument usually turns not on the existence of the debt but on whether acceleration arose in due form. The Act makes the power to demand the whole of the debt conditional on default in two consecutive instalments, on full performance of the obligations and on a notice of defined content. The absence of any one of these elements renders the acceleration, and the proceedings founded on it, open to challenge.
The second heading is the scrutiny of interest. Whether the default interest applied exceeds the contractual interest by more than thirty per cent, whether interest or commission has additionally been added to the accelerated instalments, and whether interest has been run on anything other than the principal must each be examined separately against the statement of account. In respect of amounts collected in excess, the Act additionally allows the consumer to claim interest.
In a particular file we recommend that the following matters be reviewed:
- Documenting the content of the notice of acceleration, the manner of its service and the period allowed
- Verifying from the payment schedule whether default in two instalments has genuinely occurred
- Comparing the rate of default interest with the contractual interest in the agreement so as to test the upper limit
- Checking that interest, commission and similar items have not been added to the accelerated instalments
- In files with a guarantor, that both the notice containing a period and the notice of default were given separately
- Raising the claim for return and interest in time where a collection in excess is established
Independent Legal advises and conducts litigation in default and acceleration disputes arising from consumer loans, from the scrutiny of the account through to objections to enforcement proceedings and court actions.