It’s Now Official: Compound Interest is Bad

The Supreme Commercial Court declared charging interest on interest illegal.

Compound interest is one of the most treacherous things that sail the financial waters. It is also an effective instrument of putting pressure on non-performing debtors. Though per se compound interest is neither good nor bad, usually it signifies the beginning of the end.

Banks often add interest to the principal so that the interest which has been added also earns interest. In a typical situation a lender simply extends an additional loan to a struggling debtor to pay off the debt and interest and penalties, and from this moment the borrower pays interest not only on the original loan but on the interest and penalties.

The Supreme Commercial Court has ruled that banks have no right to force borrowers to pay interest on overdue interest. Interest may accrue only on the principal. When a borrower defaults the bank cannot, on its own initiative, extend a new loan and charge interest on the increased amount. The part of a loan agreement authorising the creditor to do so is now illegal and void.

The ruling concerns consumer credit.