What are the main reasons for capping interest rates in Spain?

Question

Romanian Parliament is trying to adopt a law to cap the interest rates for all loans:

According to the form adopted by the Senate’s committees, the annual effective interest rate, also known as DAE, will be limited to maximum 2.5 times the legal interest rate for mortgage loans, and to 18% per year for consumer loans

Representatives of the banking sector who attended the debate on this draft bill in the Senate’s committees opposed the initiative of limiting interest rates

Some bank representatives and analysts argued that such a law will encourage illegal borrowing, as non-bank financial institutions currently use much higher interest rates and will be forced to refuse crediting some clients.

I could not find the reasons for introducing such a law, just a justification:

Zamfir [the initiator] claims that he got his inspiration from the model of 14 other EU countries and especially from Spain.

So, I am interested in the reasons behind interest rates capping in Spain.

Question: What are the main reasons for capping interest rates in Spain?

Answer 1

This would appear to be part of Spain's usury legislation.

Usury is the practice of lending at unreasonable levels of interest. Lenders offer loans at a very high rate of interest when they have a reasonable expectation that the loan won't be repaid. Thus they need to make sufficient profit on those loans that are repaid to cover losses on bad debts.

So if you are an employed person with a house you can get a secured loan at a good rate because the lender can expect to be paid in full. But if you don't have a steady income or security you will not be able to get a loan at a good rate. This leads to a cycle of debt, with unpaid loans being financed by more loans, at an ever-increasing rate of interest. And people being trapped in debt with no possibility of escape. People take out loans for short-term benefit, without considering the long-term consequences.

Spanish law says, in effect, "If you are so unlikely to be able to repay a loan that the lender feels that they need to charge a very high rate of interest, you should not be allowed to have a loan at all." By capping lending rates, the government is saying to lenders. "Don't loan to people who will have trouble repaying the debt." They are doing it to protect people from taking loans that will be ultimately not in their interest.

(about Spanish Usury Law)

Answer 2

James K's answer is correct about the reasons in favor of limiting interest rates¹.

That said, since Spain's laws are specifically quoted, I would like to give some additional data.

First, there are three different rules:

• for remunerative interest: what is usually understood as the interest.

• for 'late' interest: interest to pay if the borrower delays in the payments.

• for 'late' interest of mortgages.

For the first one, the regulatory basis is a law from 23 July of 1908 that declares void and null loans with excessive rates that are accepted because the borrower is in a situation of need(link in Spanish). It does not set a fixed limit, though, and sentences often differ; the link states that in a case a 20.5% rate was considered lawful by the Supreme Court, a 29% one abusive. In any case, I cannot find any reference to a "hard" limit².

For 'late' interest rates in loans, recent sentences(link in Spanish) have capped those to 2 points over the remuneratory interest; if the remuneratory interest is 8% the late interest must be at max 10%. This is important because usury usually relies on people being unable to pay in time, the 'late' interest rates are overlooked by customers who believe they will be able to pay.

For 'late' mortgage interest rates, recent sentences by the Court of Justice³ of the European Union have set a cap of 2.5 times the legal interest of money. This limits is independent of the 2% limit above specified, so the minimum of both values should be applied. Also of interest is that it declares an abusive 'late' interest clause completely null; if the clause is abusive it is not to be "ammended" by the judge but completely ignored so the only appliable interest rate would be the renumerative.

Also, this last rulings have led to some courts recently setting a cap of 2.5 times the legal interest of money for the 'late' interest for personal loans, but AFAIK these rulings were done by lower courts and still there is no validation by the Supreme Court.

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¹You can see an example of what lawmakers want to avoid in this John Oliver program. And this other program about car loans is remarkably similar.

I would like to add that, unlike the USA, in Spain there is no possibility of filling for personal bankruptcy.

²A few years ago there was a series of sentences against chains of "small loans suppliers" who targetted high interest loans towards people who had difficult getting loans from banks; the judges considered that asking twice the interest rate of banks was usury.

³Like this one.