【ARRON&SIMON Viewpoint】On chaotic phenomena in private lending

Date:2020-04-24 Author:Simon Yang

In recent years, in order to meet the fund demand of economic market, enterprise and individual require further flexible way of fund lending to meet the requirement of operation and life.

Compared with bank credit, petty loan procedure is simple, with quicker lending. Bank loan is onerous in review process, with economic income and personal credit record of the borrower taken into account so as to determine whether to make loan according to specific circumstance, in addition, petty loan company

However, according to existing provisions, petty loan company is not financial institution, being joint-equity enterprise engaging in special commodity, however, petty loan lending company also specializes in lending business. The ambiguity in lawmaking and supervision makes petty loan company in rapid development go out of control from time to time even involve in delinquency. Lawyer Yang in the term presents chaotic phenomena of petty loan business by many hands-on cases so as to enable the public to be discreet in lending business so as to avoid being deceived.

1.Signing of High-Valued Loan Contract  in lending

I would like to introduce a basic knowledge here, where there is a faultless IOU in private lending, in principle, the peoples court is not likely to confirm lending relationship by means of IOU alone. The loan contract by natural person is taken as a real contract, with the date of signing thereof taken as the time of establishment of the contract other than the time for contract to take effect. (in practice, where the loan is small in amount and not up to the standard of proof, the peoples court may confirm the lending relation) 

As the saying goes that a literate ruffian is horrible. In actual life, some petty loan companies demand the party in need of money to sign High-Valued Loan Contract before lending. What is High-Valued Loan Contractthe High-Valued Loan Contract means that the amount of the loan you acknowledged is higher than the amount of the loan you actually borrowed, these lending companies do not only make you sign High-Valued Loan Contract but also keep fund transfer record properly.

A Ms.Liu who was keen on gamble and became debt ridden, she applied to a petty loan company for property mortgage loan and paid off her debt. Later, Ms. Liu was in need of RMB 600,000 yuan due to her willing to take over the tenancy of a shophouse, so she resort to the petty loan company again, at that time, the petty loan company demanded that High-Valued Loan Contract should be signed before making a loan, accordingly, Ms. Liu signed a loan contract for RMB 3 million yuan, further more, after contract signing, the petty loan company took Ms.Liu to bank and transferred RMB 1 million yuan to Mr. Liu bank account and then asked Ms.Liu to withdraw RMB 1 million yuan from the bank and handed it to them and then they took Mr.Liu to another bank to repeat the above mentioned transfer and withdrawal, finally, the petty loan company handed RMB 600,000 yuan to Mr.Liu.

And now, everyone should know what had happened, Ms. Liu in the above mentioned case borrowed  

RMB 600,000 yuan with a loan contract for RMB 3 million yuan signed and RMB 3 million yuan transferred to Ms. Lius account shown on Ms.Lius bank card, in that way, what decision will be made based on such a complete evidence chain by the peoples court? Some readers may ask: are they suspected of criminal offence? Yes! This behavior is indeed suspected of fraudulent crime, however, it is very difficult for public security organ to place the case on file and investigate the case and ascertain the truth in practice.

2.Interests under the pretext of low interest rate but to be amortized

Prior to telling the case, we would like to explain a basic concept in the sector; according to article 26 of Regulation on Several Issues about Application of Law in Hearing of Private Lending Case, where the annual interest rate agreed by both parties is no more than 24% and the lender request borrower to pay interests according to agreement, the peoples court shall uphold it, where the interest rate agreed by borrower and lender is more than 36% and the part in excess of the amount shall be null and void and where borrower request lender to pay back the paid the part of the interests in excess of the 36%, the peoples court shall uphold it.

In short, where the annual interest rate defined in lending contract is below 24%, which shall be legal and upheld by peoples court and applicable to enforcement procedure, where annual interest rate is from 24% to 36%, the peoples court shall not get involved in it, namely the peoples court shall not discourage you from paying the interest and shall not enforce you to pay the interest if you fail to pay the interest, which shall be taken as natural obligation, where the annual interest rate is more than 36% and the interest is paid, the borrower is entitled to apply to peoples court to enforce the lender to pay back the part of the interest in excess of 36%.

There is a case, in which a friend came for consultation, saying that he was to borrow money from a petty loan company with an annual interest rate at 10%, it sounds that the interest rate was not high, but I smelled something fishy after checking the document.

It is obvious that petty loan company inveigles you into borrowing money from it under the pretext of low interest rate on the premise that you need to pay principal and interest every month. For example, if you borrow RMB 500000 yuan, with gross interest in a year up to RMB 45000 yuan, when you try to calculate the annual interest rate, you figure out that it is only at 9.0%, however, when you repay principle every month, you need to pay the same amount of interest every month with the principal on the decrease on a monthly basis. Accordingly, the interest rate shall be calculated on a monthly basis and then converted into annual interest rate.

In a nutshell, your principal and interest are paid off in the remaining one or two months within the agreed payment period but you still need to pay interest, in this way, what is the actual interest rate? Such calculation shall result in the highest interest rate in finance. It seems to be low interest rate, but the actual annual interest rate is up to 100% and above.

3.Attention shall be paid to preparation of lending contract to avoid stupid mistake

First, we need to know a concept.

Receipt for a loan is the voucher issued by lender to borrower to indicate item or fund borrowed by borrower to lender and certify borrowing relation and it is the borrowing certificate issued by borrower to lender in private lending.

IOU is the voucher issued by debtor to creditor to indicate item or fund owed by debtor to creditor and certify debtor-creditor relationship.

Receipt is voucher issued by receiver to giver to indicate item or fund from giver received by receiver and reflect or certify the fact of having received.

Although the difference between receipt for a loan and IOU lies in a single word in Chinese, as the saying goes that win or lose by a hair. First, they are different in cause, the IOU indicates debtor-creditor relationship between both parities and there are various causes of IOU, in addition to debtor-creditor relationship, there may be contractual obligation and tort obligation etc. In short, loan is necessarily equal to debt, but debt is not necessarily equal to loan.

Second, they are different in weight of proof. Receipt for a loan is greater than IOU in weight of proof, in case of litigation, the holder of receipt for a loan is only required to explain the lending fact to peoples court, it is very difficult for the borrower to repudiate his or her debt. Where IOU holder files a lawsuit in peoples court and the borrower disavows or files a demurrer to the charge, then, the IOU holder is required to further offer proof of the IOU and relevant evidence, for example, where the IOU is due to sales contract, the sales contract shall be presented accordingly.

Third, they are different in limitation of action: 1. The limitation of action of the receipt for a loan and IOU with repayment period shall be three years from the due date of the repayment period. 2. The limitation of action for the receipt for a loan without repayment period shall be three years from the date on which lender claims his or her right to demand the borrower to repay the loan at any time, where right holder claims his or her right again, the limitation of action thereof shall be discontinued and renewed for another three years based on recalculation, where lender fails to demand repayment of loan from the date on which receipt for a loan is issued within 20 years, he or she shall forfeit his or her right to win a lawsuit. 3. Where IOU fails to indicate repayment period, the lender may also demand borrower to repay loan at any time, the limitation of action thereof shall be three years from the date on which he or she claims his or her right, making no difference in terms of interruption of limitation of action, however, where lender fails to claim his or her right within three years from the date following the day on which IOU is issued, he or she shall forfeit his or her right to win a lawsuit.