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Surprise! The interest rate is 90 percent

Dear Debt Adviser,
We have a person trying to collect $90 interest, per month, on a $1,200 debt. Can you tell me what rate of interest this would be and if this is legal? Nothing was ever agreed to in writing, or verbally beforehand, regarding interest. We have repeatedly tried to pay her the $1,200 and she is refusing to accept it. She's demanding that we pay this "interest" as well. We are less than 90 days late in paying this debt, and she is trying to charge us four months' worth of interest ($360). One month went by before we even knew what the amount of the bill was. I really very much appreciate your attention to this matter. Thank you.
-- Toni

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Dear Toni,
I can't believe you took a loan from "a person" without knowing the repayment terms or the interest rate.

For the record, the interest rate that she is asking you to pay is a 90 percent annual simple interest rate. If you knew the person who lent you the money, shame on them for charging you such a high interest rate. If you didn't know the person, shame on you for not asking basic questions. Now that we have the shame part out of the way, let's see what your options are. A note of caution however -- if this person does this for a living, then all bets are off.

The situation that you find yourself in is why it is always a good idea to discuss the terms for borrowing money from anyone before money changes hands, and put the agreement in writing to make sure you both understand what is being agreed to. Had you known that this individual was planning to charge you $90 a month in interest charges, you might have passed on the loan.

The general rules for this sort of thing are covered by your state usury laws. These laws typically exempt big banks, pawnbrokers and payday loan companies. They do, however, apply to individuals. You can find a list of the state rates allowed at www.lectlaw.com. My guess is that individuals who lend money without a written note, and at 90-percent interest, may not be impressed with the law.

For my readers who are considering a loan transaction with an individual, let me offer this advice: Whenever you are lending or borrowing money, first get the terms in writing. Be sure to include the interest rate, due dates and payment amounts. Specify what happens if there should be a late or missed payment. Agree on a payment address, and ask for receipts for payments.

One of your options is to put in writing an offer, to the person from whom you're borrwing the money, for a reasonable interest rate -- say 15 percent or $15 per month, for the four months that she believes you owe interest on the $1,200 loan. Send the offer by U.S. mail, certified, return receipt requested. (This is a paper trail that will allow you to prove your side of the story in court, should things get that far.)

If she refuses the reasonable interest-rate offer, then you have a decision to make. Either send her a check for the original $1,200 with a letter stating you are paying her back the original amount of the loan and nothing else or send her a check for the total amount she is asking including the $360 in interest.

If this transaction was with a less-than-reputable person who does this sort of "lending" for a living, I would recommend preserving your health and well-being by paying the $360 in interest. You can chalk the loss up to experience, and as life experiences go, many others are much more expensive.

Toni, I know you want to make good on the debt and possibly keep whatever relationship you have this person going. In the future, remember, the devil is in the details, so beware of the details of the deal.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or click here to ask a debt question.

Bankrate.com's corrections policy-- Posted: Oct. 21, 2005
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