Perspective | A Summary of Practical Key Points in Disputes over Financial Loan Contracts (Part 1)

Financial loan contracts generally fall under the category of consensual contracts, meaning they are established and take effect upon the mutual agreement of intent between the parties. According to Article 679 of the Civil Code of the People's Republic of China, only loans between natural persons are considered real contracts (i.e., the contract is established when the lender actually provides the loan). All other loan contracts, including financial loan contracts, are consensual contracts. In other words, once a bank and a borrower sign a contract, both parties are bound by its terms and must perform their obligations accordingly: the lender must disburse the loan in full and on time, while the borrower must receive and use the loan as agreed. Otherwise, even if the borrower has not yet actually withdrawn the funds, they may still be held liable for breach of contract. In practice, loan contracts are typically executed in written or electronic form. If the bank has already disbursed the loan without affixing its official seal to the contract, this is generally regarded as an acknowledgment of the contract’s contents, and the contract is thus legally established and effective. It is important to note that, unlike private loans which are subject to special regulations such as caps on annual interest rates, the validity of financial loan contracts is primarily governed by the general provisions of contract law. However, if the contract is legally required to undergo approval or registration, the relevant procedures must be completed before the contract can become effective.

During the contract-signing process, banks should pay close attention to the compliance of the contractual parties and formalities. If the borrower is a corporate entity, the bank must verify that the signatory has appropriate authorization. For large-scale loans or external guarantees that exceed the scope stipulated in the company’s articles of association, pursuant to Article 16 of the Company Law of the People’s Republic of China, such matters must be approved by a resolution of either the board of directors or the shareholders’ meeting. Although internal resolutions fall within the scope of a company’s internal governance, debtors’ shareholders cannot invoke the absence of a shareholders’ meeting resolution as a defense against the bank. However, in practice, debtors’ shareholders may challenge the validity of the contract on the grounds of lacking approval. Therefore, out of prudence and due diligence, banks should review and retain relevant resolution documents to ensure they can take the initiative should any issues arise in the future.

In financial loan disputes, the burden of proof typically falls primarily on the lending bank. As the plaintiff, the bank must establish and demonstrate that the loan legal relationship was duly established and actually performed, including submitting the loan contract, promissory note, disbursement voucher, repayment records, and other relevant documents. In particular, regarding the determination of the loan fact itself, the bank should provide evidence of fund disbursement to prove that the principal amount of the loan was delivered as agreed and that the borrower received the funds. Courts generally rely on the contract and the disbursement voucher to confirm the existence of the loan. If the borrower argues that they did not receive the loan or that the funds were used for purposes inconsistent with the agreement, the bank must also present evidence demonstrating that the borrower actually received the funds or that the funds were transferred in accordance with the contract—for example, evidence such as the borrower’s stamped acknowledgment of receipt of collection notices or other similar details—to verify the performance of the loan obligation.

Moreover, proving the terms related to interest rates also presents a significant challenge. The loan interest rate should be explicitly stipulated in the contract; otherwise, unclear proof could work against the bank. In the current environment, many financial lending transactions are conducted online. Even when loans are processed via the internet or online platforms, financial institutions remain responsible for demonstrating that the loan interest rate has been mutually agreed upon by both parties. Internal electronic data must show that the borrower has confirmed the rate; otherwise, the court will deem the agreement ambiguous and determine the interest rate based on factors such as market rates. Therefore, banks should carefully preserve electronic records of the contract-signing process, screenshots confirming the interest rate, and other relevant electronic data to meet evidentiary requirements.

Moreover, with regard to disputed facts such as the intended use of the loan and breaches of contract, banks should also provide corresponding evidence to support their claims. For instance, if a bank alleges that the borrower failed to use the loan for its intended purpose, it must present evidence demonstrating the flow of funds to substantiate the breach; if the bank claims that the loan term was prematurely terminated, it must provide proof that it had duly notified the borrower in accordance with the contract. Failure to produce sufficient evidence may make it difficult for the bank to have its claims upheld. In civil litigation, the principle "he who asserts must prove" is fundamental. Financial institutions should therefore maintain proper records and preserve relevant evidence to avoid bearing adverse consequences due to insufficient proof.

The establishment and performance of the loan legal relationship serve as the foundation for court proceedings. The key to establishing the facts of a loan lies in confirming that the loan contract is genuine and valid and that the loan has actually been disbursed. Generally speaking, a written loan contract signed by both parties serves as proof of the existence of the creditor-debtor relationship. As previously mentioned, a financial loan contract is a compensated contract; unless the borrower can prove that the contract is invalid or that the funds received were not a loan, the borrower cannot deny the existence of the debt relationship.

With regard to actual disbursement of loans, courts typically require lenders to provide supporting documentation such as bank transfer records and borrower’s receipts. If the loan is directly transferred by the bank into an account opened by the borrower at the same bank, the arrival of funds can also be verified through the account’s transaction history. Additionally, loan agreements and receipt notes issued by the borrower serve as crucial pieces of evidence. A common scenario in practice is “borrowing under another’s name” or “A lends to B,” where the contractual borrower is not the actual user of the loan proceeds. In such cases, courts generally base their judgments on the principle of contractual relativity and whether the bank was aware of the situation. In most instances, the court will hold the nominal borrower liable for repayment to the bank, regardless of whether the nominal borrower subsequently transferred the loan proceeds to others for use. This view is also reflected in guiding cases issued by the Supreme People’s Court: The fact that the borrower has transferred the loan funds to another party for use does not negate the bank’s right of recovery; unless the bank knowingly and expressly approved the change of the debtor, it remains entitled to pursue repayment from the nominal borrower and any guarantors according to the terms of the contract. This underscores the importance of banks strengthening their due diligence during the loan approval process, carefully scrutinizing both the intended use of the loan and the flow of funds, and taking measures to prevent “borrowing under false names” or misappropriation of loan funds. Where necessary, banks should explicitly prohibit the transfer of loan proceeds in the loan agreement itself and implement appropriate post-loan management practices.

If the borrower argues that the contract is invalid or does not reflect their true intention, the validity of the contract must be determined on a case-by-case basis. If the contract was entered into through fraud, coercion, or by borrowing under someone else’s name—and such claims are verified as true—then the contract may be deemed invalid or relatively invalid. However, such cases are extremely rare in the field of financial lending; typically, they arise from borrowers’ malicious attempts to challenge the contract. In response to such challenges, banks should provide evidence—including records of the contract-signing process, minutes of face-to-face interviews, and identity verification documents—to demonstrate that the contract was genuinely signed by the borrower and entered into voluntarily, thereby refuting the opposing party’s arguments.

In short, as long as the loan contract meets all formal requirements and the loan funds have actually been delivered, courts generally recognize the existence of the loan transaction. If the borrower claims that they did not receive the funds or that a third party actually used them, they must present contrary evidence; otherwise, it will be difficult for them to obtain judicial support.

A major issue in financial loan contract disputes is the question of guarantees. Such issues arise with very high frequency and include forms such as suretyship, mortgage, and pledge. The validity of these guarantees directly affects whether the creditor’s claims can be smoothly enforced.

A guarantee contract typically exists concurrently with the principal contract, under which the guarantor undertakes joint and several or supplementary liability for repayment in the event that the borrower fails to perform its debt obligations. The validity of a guarantee depends first and foremost on the legality and validity of the guarantee contract itself: the guarantor must possess civil capacity for legal acts, their expression of intent must be genuine, and the contract must not violate any mandatory provisions of law. According to Article 685 of the Civil Code of the People's Republic of China, a guarantee is an accessory contract; if the principal debt contract is invalid or does not come into existence, the guarantee is likewise invalid. However, the fact that the principal contract can be revoked or terminated does not affect the validity of the guarantee. In practice, guarantee contracts are often standardized forms provided by banks, which are signed or sealed by the guarantor for confirmation. Once the guarantee contract is established and the principal debt is valid, the guarantor becomes bound by its terms.

It is important to note the system of the guarantee period. Article 692 of the Civil Code of the People’s Republic of China stipulates that, for both general guarantees and joint and several guarantees, the statutory guarantee period is six months from the date on which the term for performance of the principal obligation expires (the parties may agree otherwise, but such agreement cannot be shorter than the expiration of the principal obligation; otherwise, it shall be deemed that no agreement has been reached). During the guarantee period, the creditor must not only assert its rights against the debtor but also, when necessary, assert its rights against the guarantor in accordance with the law. Otherwise, once the guarantee period expires, the guarantor will be exempted from liability. Therefore, banks must promptly exercise their claims within the guarantee period—for example, by filing a lawsuit or sending a written demand—to avoid the guarantor’s liability becoming time-barred. It is worth mentioning that, in practice, some banks include in their guarantee clauses provisions such as “the guarantor’s liability shall continue until the principal and interest are fully repaid” or similar wording. Such open-ended guarantees, which impose an excessive burden on the guarantor, are considered ambiguously worded and, under the law, will still be treated as having a statutory guarantee period of six months. Hence, banks should avoid using vague terms such as “permanent guarantee” or “everlasting guarantee” to prevent ambiguity in determining the guarantee period.

Moreover, the qualifications and authority of the guarantor also affect the validity of the guarantee. According to legal provisions, state organs may not serve as guarantors, and public-interest entities such as schools and hospitals may, in principle, not provide guarantees to external parties. When a company provides a guarantee for another party, it must follow internal decision-making procedures. Article 16 of the Company Law of the People’s Republic of China stipulates that if a company provides a guarantee for its shareholders or actual controllers, such guarantee must be approved by a special resolution passed at a shareholders’ meeting. If a bank knowingly extends a loan despite knowing that the company’s guarantee was not internally approved, it may face the risk of having the guarantee contract declared invalid. Therefore, when accepting a corporate guarantee, banks should require the company to provide resolutions passed by its board of directors or shareholders’ meeting, review any authorization restrictions set forth in its articles of association, and ensure that the guarantee has obtained the necessary internal approval. As for individual guarantors, banks should verify their identities and financial situations, and should, whenever possible, avoid situations where a substantial guarantee is undertaken using marital joint property without the consent of the spouse. If it is necessary to provide a guarantee using marital joint property, it is advisable to require both spouses to jointly sign the guarantee contract or to include an explicit statement of consent from the spouse in the guarantee contract, clearly indicating that the spouse agrees to assume joint liability with the other party. Simply having the spouse sign the guarantee contract merely as a “witness” often does not suffice to make them directly liable as a co-guarantor; in litigation, merely relying on the marital relationship to add the spouse as a defendant is typically not supported. Therefore, banks should strengthen the effectiveness of the guarantee over joint property by having the spouse jointly sign the guarantor’s identity document or by obtaining a written consent letter from the spouse.

The scope of the guarantor’s liability shall be determined in accordance with the contractual agreements and applicable legal provisions. The primary difference between a general guarantor and a joint and several guarantor lies in their respective rights of defense: A general guarantor may refuse to make payment until the principal debtor has been subject to compulsory enforcement by the court, whereas a joint and several guarantor is required to make direct payment to the creditor and does not enjoy the right of prior suit defense. Banks typically require guarantors to assume joint and several liability, so that they can directly seek recovery in the event of default. After a default occurs, the amount paid by the guarantor generally includes the principal, interest, liquidated damages, and reasonable expenses incurred in enforcing the creditor’s rights—provided that these costs are covered by the guarantee contract and do not exceed the scope of the underlying debt. If the interest or liquidated damages stipulated in the main contract exceed the statutory limits, the guarantor’s liability shall be limited to the extent permitted by law. For example, any interest exceeding four times the Loan Prime Rate (LPR) is not legally protected, and thus the guarantor shall not be liable for the portion exceeding this limit. At the same time, after making compensation on behalf of the debtor, the guarantor has the right to seek reimbursement from the debtor—a right that is statutorily ancillary to the guarantee contract.

Finally, the impact of “borrowing new to repay old” on guarantee liability is also an important issue in practice. When a bank agrees to use a new loan to repay an existing loan, if the original guarantor’s consent has not been obtained, the new loan is generally regarded as a new debt arrangement. Article 39 of the Supreme People’s Court’s “Interpretation on the Application of the Security Law” explicitly states: “If the parties to the principal contract agree to repay the old debt with a new loan, unless the guarantor knew or should have known about it, the original guarantor shall not bear civil liability.” In other words, if the borrower and the bank reach an agreement to repay the prior debt with a new loan, the original guarantee is, in principle, discharged, and the guarantor will not be liable for the new debt—unless it can be proven that the guarantor was aware of the arrangement yet still agreed to provide the guarantee. However, if the guarantor for both the new and the old loans is the same person and that person participated in signing the new loan contract, the guarantor will be deemed to have been informed, and the new and old debts will effectively be treated as one entity. In such cases, the guarantor may not refuse to assume responsibility on the grounds of “lack of knowledge.” Therefore, when handling “borrowing new to repay old” transactions, banks should ensure that the original guarantor reconfirms the guarantee; otherwise, the guarantor’s liability could be discharged.

Mortgage is an important safeguard that ensures banks have priority in repayment; however, the establishment and enforcement of mortgage rights must strictly comply with statutory requirements. First, the mortgaged property must be property that is legally permitted to be mortgaged. The Civil Code of the People's Republic of China lists the types of property that are prohibited from being mortgaged—for example, land ownership, public-interest properties such as schools and hospitals, property whose ownership is unclear or subject to dispute, and property that has been lawfully seized or detained—none of which may be used as collateral. When reviewing mortgaged assets, banks should verify that the mortgagor holds legitimate disposal rights over the property and avoid any types of property that are expressly prohibited by law from being mortgaged. If a mortgage contract is entered into in violation of these prohibitions, the mortgage clauses may be deemed invalid, and the bank will lose its priority right to repayment. Therefore, banks should pay particular attention to the nature and limitations of the property rights associated with the mortgaged assets.

The establishment and effectiveness of a real estate mortgage typically require registration as a public notice. The mortgage registration must be carried out at the legally designated registration authority. The mortgage right is established upon registration; without such registration, the mortgage right will not be enforceable against third parties. For example, a mortgage on real estate must be registered with the real estate registration authority, a mortgage on movable property must be registered with the market supervision authority, and a pledge of accounts receivable must be registered in the credit information system. Banks should complete the relevant registration procedures to ensure that the mortgage right is established lawfully and effectively. If the bank neglects to register the mortgage, even if a mortgage contract has been signed, the bank could lose its priority position in receiving payment. Mortgage guarantees emphasize the principle of specificity. The mortgaged property must be clearly identified and specified, and the mortgage contract must state the name, quantity, value, and location of the mortgaged property. Regarding the value of the mortgaged property, banks should conduct a reasonable valuation and take into account the costs associated with enforcing the mortgage right. Particular attention should be paid when setting the mortgage ratio. If the value of the mortgaged property is significantly insufficient to cover the principal, interest, and disposal costs of the debt, the bank should request additional collateral to prevent the creditor’s claim from remaining unfulfilled during enforcement.

Once the debtor defaults, the bank can exercise its mortgage lien to obtain priority repayment. However, there are still challenges in enforcing mortgage rights during the execution phase: for instance, if the mortgaged property is subject to multiple other rights (such as repeated mortgages or successive seizures), or if the property is occupied and used by third parties, these factors can all hinder the efficiency of disposal. To address this, banks should apply for a seizure of the mortgaged property before filing a lawsuit and pay close attention to the order of mortgage liens and the sequence of seizures. In cases of multiple mortgages, repayment will be made according to the order of registration; in cases of successive seizures, the authority that first applied for the seizure should carry out the enforcement or coordinate with the court at the same level to handle the property centrally. Banks can actively communicate with the courts and adopt methods such as online judicial auctions to enhance the rate of asset realization. If necessary, they may also adopt flexible approaches, such as accepting assets in lieu of debt repayment. After the mortgaged property has been realized, any shortfall will be borne by the borrower and the guarantor, while any surplus will be returned to the mortgagor.

Pledge is divided into pledge of movable property and pledge of rights; both types rely on the transfer of possession or registration as their method of public notice. For a pledge of movable property, the pledged item must be in the possession of the creditor or a third party; otherwise, the pledge right will not take effect. Banks commonly encounter pledges of movable property such as inventories and machinery and equipment. Since it is inconvenient for banks to maintain long-term possession of such items, in practice, they often resort to third-party custody or have the pledgor retain control while signing a prior document establishing possession. This practice carries risks: once the pledged item is resold or lost, the bank’s pledge right becomes void. Therefore, with respect to pledges of movable property, banks should, whenever possible, maintain actual control over the pledged item or adopt regulatory measures that comply with legal requirements to ensure the item’s independence and specificity.

For rights pledged—such as bills of exchange, bonds, certificates of deposit, equity interests, and accounts receivable—registration of the pledge or notification to the relevant obligors must be carried out in accordance with legal provisions. Taking equity pledges as an example, the pledge must be registered with the company registration authority in order to be enforceable against third parties; for pledges of accounts receivable, public notice must be registered with the Credit Reference Center of the People's Bank of China. If a bank fails to complete the registration, it will not be able to obtain priority rights against bona fide third parties. Moreover, the pledge contract must clearly specify the type and amount of the pledged property—for instance, when pledging bills of exchange, the original bill must be delivered and endorsed; when pledging equity interests, the pledge must be recorded in the register of shareholders, and such formal requirements are indispensable.

In terms of realizing the pledge, after a debt default, the pledgee is legally entitled to auction or sell the pledged property and receive priority payment. However, banks may not arbitrarily seize the value of the pledged property to offset the debt or directly dispose of the pledged property; instead, they must do so through an agreement with the pledgor or via court enforcement procedures. In practice, the challenges in pledge-based security often stem from fluctuations in the value of the pledged assets and restrictions on the exercise of rights. For example, when stocks are pledged, a sharp drop in stock prices or suspension of trading might prevent timely liquidation; similarly, when accounts receivable are pledged, the debtor might raise defenses or disputes over the underlying contract. To address these risks, banks should stipulate risk-handling clauses at the time the pledge is established—for instance, requiring the pledgor to provide additional collateral if the value of the pledged asset falls short, or returning any excess value above the secured claim once the pledged asset’s value exceeds the outstanding debt. If necessary, banks can also apply to the court for preliminary enforcement measures, such as freezing the pledged property, to prevent improper disposal of the pledged assets.

In short, the effectiveness of guarantees such as suretyship, mortgage, and pledge hinges on meeting the formal requirements and exercising rights in a timely manner. Banks should establish a comprehensive guarantee review system, meticulously scrutinizing each aspect—from the eligibility of the parties involved and internal approval procedures to property ownership and registration formalities—so as to ensure that the guarantee contract is validly established and that the security interest in the collateral is properly created. Once the debtor defaults, the bank must promptly exercise its guarantee rights in accordance with the law to effectively secure the recovery of its claims.

Interest and default interest are among the most contentious issues in financial loan contracts. According to the contract terms, borrowers are required to pay interest during the loan period; if they fail to repay on time, they must also pay overdue interest and any agreed-upon liquidated damages. In judicial practice, the standards for supporting interest and liquidated damages are primarily based on statutory provisions and the principle of fairness, aiming to prevent excessively high interest rates or double punishment.

First, interest calculations should be clearly stipulated. As a core term of the contract, the interest rate must be clear and precise, with no contradictions between different clauses. Banks typically specify the benchmark interest rate and the floating range in loan contracts, or fix the interest rate for the duration of the loan. If a floating interest rate or a reference rate is adopted, LPR rate In such cases, the adjustment period and benchmark should be clearly specified. If the contract does not explicitly specify or fails to include an agreement on the interest rate, the court will handle the matter in accordance with applicable legal provisions. For loans from financial institutions, Article 680 of the Civil Code of the People's Republic of China stipulates that interest rates must not violate the state’s regulations on interest rate management; if no interest rate is agreed upon, it shall be deemed that no interest is payable. In bank loans, interest rates are almost always specified in the contract; therefore, ambiguities in the interest rate agreement often arise from inconsistencies between the main contract and accompanying documents such as repayment schedules. In these situations, courts typically require banks to bear the burden of providing clarification. If the bank cannot prove that the borrower consented to a higher interest rate, the court will determine the interest rate in a manner that is more favorable to the borrower.

Overdue interest (penalty interest) is the additional interest charged by banks when borrowers default and fail to make repayments on time. Contractual agreements often stipulate that the penalty interest rate is a certain percentage higher than the normal interest rate—for example, 30% to 50% above the regular rate. The purpose of penalty interest is to compensate banks for the loss of interest income resulting from delayed debt repayment. However, it is important to note the limitations imposed on compound interest. Some contracts provide that overdue unpaid interest will be subject to compound interest at the penalty interest rate—that is, interest itself will accrue further interest. Yet, according to the People's Bank of China’s “Regulations on RMB Interest Rate Management,” during the loan term, unpaid interest can be compounded quarterly at the contractually agreed interest rate; after the loan becomes overdue, only penalty interest can be charged on the overdue principal amount, and unpaid interest can be compounded at the penalty interest rate. In other words, courts generally support compounding only on interest due but unpaid within the normal term, and do not allow compounding on overdue interest itself. The reason is that overdue interest already serves as compensation for the breach of contract, and charging interest on top of overdue interest would constitute double punishment, violating the principle set forth in Article 584 of the Civil Code of the People’s Republic of China, which stipulates that damages should be equivalent to the actual losses incurred. In judicial practice, most courts adopt this view, recognizing only the compounding of unpaid interest but not the compounding of overdue penalty interest. Therefore, even if a bank specifies in its contract terms that overdue interest will be compounded, the court may still refuse to uphold such a provision.

Regarding the upper limit on interest rates, although financial institutions’ loans are not directly subject to the judicial upper-limit provisions applicable to private lending interest rates, the Supreme People’s Court emphasized when revising the Judicial Interpretation on Private Lending in 2020 that a lender’s request for the borrower to pay interest at the agreed-upon rate should be supported—provided, however, that the agreed-upon rate exceeds the rate prevailing at the time the contract was concluded. One-year Loan Market Quote Rate The portion exceeding four times the LPR is not protected. This rule applies explicitly in private lending and also serves as a useful reference in financial loan cases. Therefore, banks should pay close attention to the formulation of default-cost clauses; excessively high interest rates and penalty interest may not necessarily be upheld by the courts.

Moreover, if the liquidated damages clause is stipulated concurrently with penalty interest, it may be deemed a double penalty. In judicial practice, loan contracts typically distinguish between overdue interest and liquidated damages: overdue interest is intended to compensate for the loss of interest incurred during the period of default, whereas liquidated damages are often used to penalize other breaches of contract or to cover costs incurred in enforcing the creditor’s rights. The Supreme People’s Court’s Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases explicitly state that lenders may not simultaneously claim both penalty interest and liquidated damages, thereby preventing disguised usury. Although bank loans are not directly subject to these provisions, courts generally do not allow the imposition of “double liquidated damages.” Consequently, if a bank has already agreed upon penalty interest, it should refrain from further claiming additional high liquidated damages; otherwise, the court may adjust the amount at its discretion. According to recent case precedents, when a loan contract stipulates both daily penalty interest for late payment and daily liquidated damages, many courts have held that the two are essentially of the same nature and will either support one of them exclusively or calculate them jointly, rather than simply adding them together.

In addition, the calculation of interest also involves situations where the loan is accelerated and the contract is terminated. If the bank declares the loan to be due and payable ahead of schedule in accordance with the contractual provisions, the debt shall be deemed fully due on the acceleration date, and thereafter, interest will be calculated at the default interest rate. It is important to distinguish that acceleration does not constitute termination of the contract; therefore, the contractual provisions regarding interest and default interest remain applicable. On the other hand, if the bank files a lawsuit seeking termination of the contract and the court confirms that the termination is valid, the contract will terminate upon delivery of the termination notice to the other party, after which the debt will become a statutory claim. Typically, in cases involving contract termination, the court will calculate interest for the period of default based on either the People's Bank of China’s prevailing benchmark lending rate for the same period or the overdue interest rate stipulated in the contract, but the higher default penalty clauses provided in the contract will no longer apply. In light of this, banks should carefully consider their choice of legal remedies when filing a lawsuit for contract termination, giving priority to asserting claims for accelerated repayment rather than seeking contract termination itself. This is because, once the contract is terminated, the higher default penalty and compound interest provisions agreed upon in the loan contract may no longer be enforceable, thereby potentially harming the bank’s interests. This point will be discussed in greater detail in the subsequent section on early maturity provisions. In summary, in matters concerning interest and liquidated damages, courts aim to both safeguard banks’ reasonable returns and prevent excessive punishment. Therefore, banks must set interest rates and default costs in compliance with the law and maintain clear documentation supporting their interest calculations.

The statute of limitations determines whether a bank’s right to win a lawsuit can be realized. In China, the general statute of limitations is three years, starting from the date on which the rights holder knew or should have known that his or her rights had been infringed upon (Article 188 of the Civil Code of the People’s Republic of China). In disputes over financial loan contracts, the three-year period generally begins to run from the date when the borrower fails to repay the loan on time or from the loan’s maturity date. If more than three years elapse without the bank asserting its claim, the debtor has the right to raise the defense of statute of limitations. Once the court reviews and confirms that the claim is indeed time-barred, it will dismiss the bank’s request for judgment. This underscores the importance for banks to promptly assert their claims against each matured debt and ensure that such claims are filed within the statute of limitations.

However, in practice, loans often involve complex scenarios such as installment repayments, loan extensions, and partial repayments, which necessitate a case-by-case analysis of how the statute of limitations is calculated and whether it is interrupted. With regard to loans repaid in installments, the Civil Code explicitly stipulates: “If the parties agree that the same debt shall be performed in installments, the limitation period for litigation shall commence from the date on which the last installment becomes due.” This provision essentially adopts the earlier judicial interpretations issued by the Supreme People’s Court, according to which, for installment payment or repayment contracts, the creditor may choose to start the limitation period all at once after the final installment becomes due. Therefore, for loans repaid monthly in installments, banks do not need to file separate lawsuits for each installment; instead, they can file a single lawsuit within three years after the final due date, covering all outstanding installments without being constrained by the fact that earlier installments may have already exceeded the three-year limitation period. This rule avoids the inconvenience of calculating the limitation period separately for each installment. However, it is important to note that if the loan contract stipulates installment performance and the bank chooses to file a separate lawsuit solely for a particular installment after the borrower defaults on that installment, there remains differing views on whether the successful outcome of that lawsuit will also interrupt the limitation period for the remaining, yet-to-be-due installments. To play it safe, banks should continue to intensify collection efforts and preserve evidence of such collection activities even before the final installment becomes due, so as to ensure that the limitation period is effectively interrupted.

The suspension and interruption of the statute of limitations are crucial for protecting financial claims. According to the law, any litigation act by which the rights holder asserts their rights (such as filing a lawsuit, initiating arbitration, or applying for a payment order) or any act by which the obligor agrees to perform their obligation (such as repaying principal and interest or making a written promise to repay) can interrupt the statute of limitations and restart the three-year period.

Regarding whether a bank’s continuously pursued debt collection claims that have spanned over 20 years are absolutely time-barred, the Supreme People’s Court recently provided guidance through a guiding case. In Guiding Case No. 249 of the Supreme People’s Court (2025), the loan matured in 1998. Over the years, the bank repeatedly pursued collection and obtained written confirmations from the debtor; however, it did not file a lawsuit until 2019—more than 20 years after the initial right was infringed. The courts at both the first and second instances dismissed the bank’s claim on the ground that the 20-year statutory limitation period had already expired. Yet, in its retrial, the Supreme People’s Court held that: In this case, the creditor had continuously asserted its rights against the debtor, and the ordinary statute of limitations had been interrupted multiple times without ever reaching the three-year mark. As a result, the creditor’s claim had remained under legal protection throughout. The 20-year maximum protection period is intended to prevent prolonged non-exercise of rights from leading to legal uncertainty, rather than serving as a tool for dishonest debtors to evade their obligations. The creditor had consistently and diligently exercised its rights and had never neglected to assert them. It would be contrary to the principle of good faith and fair dealing if the debtor were now to argue that more than 20 years had passed. Therefore, the court ruled that the 20-year rule does not apply in this case, and the creditor’s claim remains protected. The key judicial principle established in this ruling is clear: “If a creditor continuously asserts its rights against a debtor and the ordinary statute of limitations has been repeatedly interrupted such that it has never reached the three-year mark, the 20-year maximum protection period shall not apply.” Thus, as long as the bank continuously interrupts the statute of limitations through methods such as sending collection notices or obtaining the borrower’s signed confirmation, its claim may still be successful even if it exceeds 20 years. Conversely, if the creditor fails to exercise its rights for an extended period—even if the total duration does not exceed 20 years—after three years have passed, the debtor’s defense based on the expiration of the statute of limitations could well be upheld. Therefore, banks should establish a statute-of-limitations management ledger for each non-performing loan and regularly interrupt the statute of limitations by sending collection notices, obtaining the debtor’s signature on repayment agreements, or accepting partial repayments. Once the debtor explicitly refuses to perform or becomes untraceable, the bank should promptly file a lawsuit to avoid having its claim dismissed due to the expiration of the statute of limitations.