Perspective | A Review and Study of Interest Issues in Private Lending

The interest on private loans can be agreed upon freely by the borrower and lender themselves; the law does not mandate that such agreements must be in writing. However, a written agreement can effectively help prevent disputes from arising. In practice, explicitly stating the loan interest rate and the method for calculating interest in the loan note or contract can also effectively avoid future disagreements. If the interest is agreed upon only orally, the lender will bear the burden of proof to demonstrate that such an agreement actually exists; otherwise, the court may not uphold the lender’s claim for interest.

In loan agreements, there are sometimes instances of irregular or unclear interest provisions, including but not limited to: (1) merely stipulating “interest shall be paid” without specifying the interest rate; (2) stating an interest rate figure without clarifying whether it is an annual rate or a monthly rate; (3) failing to indicate the unit of the interest rate; (4) writing the interest rate figure in a way that is ambiguous; (5) using vague wording for the interest rate that leads to differing interpretations; (6) expressing the interest rate improperly through the use of decimal points. All these situations can result in the interest provision being deemed “unclear.” According to the Civil Code and... According to the second paragraph of Article 24 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Loan Cases,” if the interest agreement between natural persons is unclear, and the lender claims payment of interest, the people’s court shall not support such claim. For example, Zhang borrowed money from Wang, and the loan agreement between them only stated, “Interest shall be paid during the loan term,” but did not specify the interest rate. The court held that since the interest agreement was unclear, it was legally deemed a zero-interest loan for the duration of the loan term, meaning Zhang was not required to pay any interest during the loan period. This serves as a reminder to lenders to clearly stipulate the interest rate terms in loan agreements to avoid losing out on interest income due to ambiguities in the agreement.

It is worth noting that the Civil Code distinguishes between cases where the lending parties are natural persons versus other entities. When both parties to a loan are natural persons and the interest rate is not explicitly agreed upon, it is presumed that no interest is payable. However, if one of the lending parties is an enterprise or other organization, and the interest rate is left unspecified, the court may, taking into account factors such as the nature of the transaction, prevailing trade practices, and market interest rates, determine the interest rate on a discretionary basis. In other words, in loan transactions involving enterprises, the court may, based on evidence and commercial practices, presume a reasonable interest rate. For example, in the retrial decision in the case of Zhang Lin v. a certain Construction Group, the Supreme People's Court held that although the loan agreement did not specify an interest rate, the lender had actually disbursed less than the agreed amount (only transferring 2.88 million yuan out of the 3 million yuan loan). Therefore, it was presumed that the parties had agreed upon an interest rate (2% per month) which had been deducted in advance. Consequently, the court ruled that the interest rate of 2% per month during the loan period was consistent with both the law and common commercial practice. This case illustrates that, for loan transactions involving non-natural persons, the court will infer the interest rate based on the conduct of the parties involved, rather than automatically assuming that no interest is payable. On the other hand, for loans between natural persons, the principle of "interest is payable only if explicitly agreed upon" is strictly applied.

The so-called “interest deducted upfront,” or “head-cutting interest,” refers to a practice in which the lender deducts the interest from the principal amount in advance when making a loan. Although this practice is commonly seen in informal lending, it is explicitly prohibited by law. Article 670 of the Civil Code of the People’s Republic of China stipulates: “Interest on a loan may not be deducted in advance from the principal. If interest has been deducted in advance from the principal, the borrower shall repay the loan based on the actual amount borrowed and calculate interest accordingly.” In other words, if the lender deducts interest from the principal amount before disbursing the loan, the law will treat the actual amount lent to the borrower as the principal, rather than the amount stated on the loan agreement. Moreover, the borrower remains obligated to pay interest calculated on the actual amount received. In the case mentioned earlier, the borrower actually received 120,000 yuan less than the amount indicated on the loan agreement precisely because the lender had deducted two months’ worth of interest in advance. During the Supreme People’s Court’s retrial, it acknowledged that the 120,000 yuan was indeed pre-deducted interest; however, based on common trading practices, the court determined that both parties had agreed to an interest rate of 2% per month. Nevertheless, after the current Civil Code took effect, even if the borrower consents to having interest deducted upfront, such an agreement would be deemed invalid, and the lender would no longer be allowed to increase its earnings through head-cutting interest. In judicial practice, the amount actually received by the borrower is typically recognized as the principal amount of the loan, and interest protected by law is calculated accordingly.

Even if the interest rate agreed upon by the borrower and lender is clearly specified, it is still important to ensure that its content does not violate any mandatory legal provisions. On the one hand, the interest rate may not exceed the upper limit protected by the courts (see Section 2 below); any agreement exceeding this limit shall be invalid. On the other hand, interest agreements must not contravene public order—for instance, charging interest in an illegal manner—such as requiring the borrower to engage in unlawful activities in exchange for interest—will naturally be deemed invalid. In cases where the interest clause is wholly or partially invalid, the lender can only assert rights based on the legally valid portion. For example, if the borrower and lender agree on an annual interest rate of 50%, the portion exceeding the statutory cap will not be protected; the court will uphold only the interest within the legal cap. Therefore, the validity of an interest agreement hinges on both formal clarity and compliance with legal requirements in terms of content. Lenders should ensure that interest rate clauses are accurate and unambiguous and are agreed upon within the bounds of the law to safeguard their own rights and interests.

Article 680 of the Civil Code of the People’s Republic of China explicitly stipulates: “High-interest lending is prohibited, and the interest rate on loans shall not violate relevant state regulations.” It further clarifies: “If a loan contract does not specify payment of interest, it shall be deemed to bear no interest; if the agreement on interest is unclear... for loans between natural persons, it shall be deemed to bear no interest.” However, the specific standard for “high interest” must be determined in conjunction with the provisions of judicial interpretations. Prior to 2020, the provisions issued by the Supreme People’s Court in 2015 applied. Judicial Interpretation on Private Lending It established the “Two Lines and Three Zones” interest-rate protection rules. According to the 2015 version of the judicial interpretation: Interest agreements with an annual interest rate not exceeding 24% are protected by law; interest agreements with an annual interest rate exceeding 36% are deemed invalid; and interest rates falling between 24% and 36% are considered “natural debts,” which courts will not enforce, though borrowers who voluntarily pay such interest cannot demand its return. This rule divides private lending interest rates into three distinct zones, effectively curbing the practice of usury with annual interest rates exceeding 36% at the time.

However, with changes in the economic environment and the marketization of interest rates, in 2020 the Supreme People’s Court revised its judicial interpretation, abolishing the fixed thresholds of 24% and 36% and instead adopting a dynamic upper limit linked to market interest rates. Article 25 of the new judicial interpretation stipulates: The interest rate agreed upon by the lending parties shall not exceed the rate prevailing at the time the contract is concluded. One-year Loan Prime Rate Four times the Loan Prime Rate (LPR). The LPR is a market-based interest rate indicator published monthly by the National Interbank Funding Center—for example, the one released on August 20, 2020. One-year LPR The interest rate is set at 3.85%, which, when multiplied by four, comes to approximately 15.4%. Consequently, since August 2020, the maximum legally protected annual interest rate for private lending has fluctuated along with the Loan Prime Rate (LPR). Compared to the previously fixed cap of 24%, the new standard significantly lowers the upper limit on interest rates. Moreover, if lenders employ various disguised methods to artificially inflate interest rates—such as charging additional fees under the guise of service charges or default penalties—the courts will convert these fees into the effective interest rate and subject them to the “four-times LPR” cap as well. Therefore, whether the interest is explicitly stated or hidden in any form, as long as the total annualized interest rate exceeds the statutory cap, the portion exceeding the cap will no longer be legally protected.

It should be noted that the new judicial interpretation took effect on August 20, 2020, and applies a “one-size-fits-all” approach to cases newly filed after that date. Four times the LPR Standards. The new regulations also provide transitional arrangements for how lending activities prior to the effective date should be handled. If a loan contract was entered into before August 20, 2020, and the case is filed after that date, when the parties request interest calculations for periods prior to August 19, 2020, the old judicial interpretations applicable at that time may be used. However, interest accrued after August 20, 2020, shall be governed by the new regulations, specifically the four-times LPR standard. Overall, for loan contracts entered into before 2020, any interest rate exceeding 36% was already deemed invalid; and if the interest rate fell between 24% and 36% and the borrower had already paid such interest, under current regulations, repayment of the excess interest is generally not supported. Yet, for loans newly signed after 2020, the agreed-upon interest rate must unconditionally be capped at four times the LPR; otherwise, any interest exceeding this cap will be considered invalid. Even if the borrower voluntarily paid the excess amount, in principle, they can still invoke the doctrine of unjust enrichment to seek its return. Thus, it is evident that the current regulations impose stricter crackdowns on usurious lending.

The method and timing of interest payments on private loans can be flexibly agreed upon by the parties involved. Common methods include:

One-time interest payment: At the loan’s maturity, the borrower repays both the principal and all accrued interest in a single lump sum. This method is commonly used for short-term loans or loans between acquaintances, where the total amount due—including both principal and interest—is agreed upon in advance. For example, if a loan agreement states, “Today I borrow 10,000 yuan at a monthly interest rate of 2 fen, to be repaid with principal and interest after one year,” then the borrower will repay the entire principal and interest in one lump sum at maturity.

Intermittent Interest Payments: When the loan term is relatively long, it’s common to stipulate periodic interest payments—such as monthly, quarterly, or annual—while repaying the principal in the final installment. The “interest-first, principal-later” approach is a typical example: during the loan period, only interest is paid at regular intervals, and the principal is repaid in full at maturity. For instance, the agreement might specify monthly interest payments of 500 yuan, with the principal of 10,000 yuan being repaid at maturity. This method alleviates the lender’s pressure on capital occupancy and is also consistent with standard financial lending practices.

Equal Principal or Equal Principal and Interest Installments: Some loan agreements stipulate that the principal is repaid in installments along with corresponding interest payments—for example, repaying a portion of the principal each month while paying the current period’s interest (similar to the equal-installment principal-and-interest or equal-principal repayment methods used in bank loans). This type of arrangement is relatively uncommon in informal lending.

It should be noted that if no agreement is reached on the timing of interest payments or if the agreement is unclear, the supplementary provisions of the law shall apply. Article 674 of the Civil Code of the People’s Republic of China stipulates: For loans with a term of less than one year, interest shall be paid together with the repayment of the principal; for loans with a term of one year or more, interest shall be paid annually, and any remaining interest for the period less than one year shall be paid together with the repayment of the principal—meaning that interest is, by default, settled on an annual basis. For example, if the parties have not agreed on the timing of interest payments and the loan term is two years, the borrower shall first pay the interest for the first year upon reaching the one-year mark, and then pay the interest for the second year and repay the principal in full upon reaching the two-year mark. If the loan term is less than one year, the interest shall be paid in one lump sum upon maturity.

Regarding the order of repayment, Article 561 of the Civil Code of the People’s Republic of China clearly stipulates: When no specific order of repayment has been agreed upon, any partial repayment made by the borrower shall first be applied to offset interest and then to principal. In other words, unless otherwise provided in the contract, each payment made by the borrower will first be treated as payment of interest; only after the interest has been fully paid will the payment begin to reduce the principal. This rule is consistent with the prevailing practice in the banking loan sector and also reflects the time value of money. To illustrate this point, consider the following case: Li borrowed 100,000 yuan from Liu, with an agreed loan term of two months but no specified order of repayment. The loan agreement did not explicitly state the interest rate for the loan period either (though the parties had verbally agreed on a daily default penalty of 1% as late-payment interest). After the loan matured, Li made several repayments totaling 50,700 yuan. However, the parties subsequently disputed whether this amount was intended to repay principal or interest. Relying on the provisions of Article 561 of the Civil Code of the People’s Republic of China, the court ruled that Li’s total repayments of 50,700 yuan should first be applied to offset interest, with any remaining amount then used to reduce the principal. Since the daily default penalty of 1% translates into an annual interest rate as high as 365%, far exceeding the legal cap, the court, in accordance with judicial interpretations, calculated the late-payment interest at an annual rate of 14.6%—four times the one-year Loan Prime Rate (LPR) prevailing at the time. After deducting the interest due, the court determined that Li still owed a principal balance of 53,540 yuan, together with corresponding interest. This case demonstrates that, in the absence of a special agreement, courts will automatically apply the “interest first, then principal” principle when calculating repayment, and will deduct any interest payments exceeding the statutory cap.

Both overdue interest and liquidated damages are measures that lenders may take in response to a borrower’s default (failure to repay on time). However, the two differ in several key ways. Overdue interest—commonly referred to as penalty interest—is the interest calculated at a specified rate on the amount that the borrower has failed to repay by the agreed-upon due date. Its purpose is to compensate the lender for the loss incurred due to the funds being tied up, while also serving as a deterrent against the borrower’s delayed performance. Overdue interest is typically stipulated in the form of an interest rate—for example, “the overdue interest rate shall be a certain percentage higher than the interest rate during the loan term,” or alternatively, a specific interest rate may be directly agreed upon. On the other hand, liquidated damages are penalties or compensation amounts that the parties have agreed upon in the contract, which the borrower must pay upon default according to a fixed sum (or a specific calculation standard). Liquidated damages can be either a fixed amount or calculated as a percentage, and they are not necessarily expressed in terms of an interest rate. In short, overdue interest focuses on interest-based compensation for default, whereas liquidated damages represent monetary compensation for default.

Moreover, the two differ in their legal nature: overdue interest is generally regarded as a form of liability for breach of contract; however, the law does not mandate the automatic accrual of overdue interest simply because a contract fails to specify it—rather, such interest can only be claimed if explicitly provided for in the contract or stipulated by law. By contrast, liquidated damages depend entirely on the agreement between the parties; without an explicit agreement, liquidated damages cannot, in principle, be claimed. Therefore, if a loan contract does not include a provision for liquidated damages, the lender cannot claim compensation in the form of liquidated damages. However, even if no provision for overdue interest has been agreed upon, the lender can still, under the provisions of the law, require the borrower to pay overdue interest as compensation for losses resulting from the delayed performance.

In many loan agreements, lenders often stipulate both an overdue interest rate and additional default penalties to safeguard their own rights and interests—sometimes even adding so-called “collection fees” and “attorney’s fees” as “other expenses.” How such situations should be handled is a crucial issue in judicial practice. According to the Provisions on Judicial Interpretation of Private Lending, if both an overdue interest rate and a default penalty are agreed upon simultaneously, the lender may choose to claim either one or both, provided that the total amount claimed does not exceed four times the one-year Loan Prime Rate (LPR) prevailing at the time the contract was concluded. Simply put, this provision aims to prevent lenders from obtaining excessive profits by relying on “dual default penalties.”

In a related response, judges from the First Civil Division of the Supreme People's Court further clarified that overdue interest is, in nature, a type of liquidated damages—compensation for breach of contract in the form of interest. If the contract separately stipulates a clause on liquidated damages, resulting in the coexistence of “two types of liquidated damages,” the principle of “non-duplication of penalties” shall be applied. Therefore, the lender may not simultaneously and without limitation claim both overdue interest and liquidated damages; rather, the lender must choose one or the other, or—if opting for both—it must ensure that the total amount claimed does not exceed the higher of the two and avoids any duplication. In cases where the loan contract only specifies liquidated damages without explicitly providing for overdue interest, the lender may both claim liquidated damages and, pursuant to law, assert statutory overdue interest. The court will uphold such “dual claims” to ensure adequate compensation; however, in the final judgment, the combined total amount of both liquidated damages and overdue interest will still be capped at four times the Loan Prime Rate (LPR). In other words, the liquidated damages clause does not preclude the application of statutory overdue interest, but when both are claimed concurrently, they are subject to a unified cap.

In private lending, certain fees often appear under various names, such as “service fees,” “management fees,” and “intermediation fees.” These fees are typically linked to the loan amount and, in essence, serve as a disguised way of increasing the lender’s remuneration. According to judicial interpretations, such fees should be regarded as part of the interest and thus subject to the cap on interest rates. In earlier responses, the Supreme People’s Court pointed out that any fee charged by the lender to the borrower in exchange for obtaining a return is, in nature, considered interest. Therefore, the parties cannot circumvent the interest rate restrictions by agreeing on high handling fees. If the lender claims the sum of the loan principal, interest, default penalties, and various fees, the court will convert all these fees into an annualized interest rate for review. Any portion exceeding four times the Loan Prime Rate (LPR) will not be supported.

In summary, according to Article 29 of the “Judicial Interpretation on Private Lending,” “If the lending parties have both agreed on an overdue interest rate and on liquidated damages or other fees... the portion of the total amount exceeding four times the one-year LPR at the time the contract was concluded shall not be supported by the people’s courts.” Accordingly, regardless of whether the lender requests overdue interest, liquidated damages, or both, the court will calculate the actual interest rate to ensure that the total does not exceed the statutory upper limit. At the same time, all fees of various kinds will be aggregated and considered together with the interest. The purpose of these provisions is to prevent borrowers from being subjected to repeated penalties or effectively high interest rates in disguise, thereby maintaining a balance of interests in the lending relationship.

What is commonly known in folk terms as “interest compounding” is legally referred to as compound interest or capitalization of interest. It involves adding the accrued interest due but unpaid at maturity to the principal, thereby using the new total as the basis for calculating further interest. Typically, this takes the following form: When a loan matures and the borrower has not yet repaid both the principal and accrued interest, the parties settle the outstanding interest, add it to the principal, issue a new promissory note, and effectively transform the old debt into a new one. At its core, interest compounding remains a contractual agreement on interest payments; the only difference is that the base amount used for interest calculation has changed (now becoming “principal plus accrued interest”). While current laws do not completely prohibit this practice, they impose strict limitations to prevent debts from spiraling out of control and growing exponentially.

According to Article 27 of the Judicial Interpretation on Private Lending, the lending parties may agree to include interest accrued over a certain period into the principal amount. However, the newly issued debt instrument can only be recognized as the principal for the subsequent loan if the interest rate for the earlier period does not exceed four times the one-year Loan Prime Rate (LPR) prevailing at the time the contract was established. Any portion of the interest exceeding the statutory cap cannot be included in the principal. In other words, if the original loan interest rate itself is lawful, then the conversion of interest into principal is legally protected; but if the originally agreed-upon interest rate was excessively high, the excess interest cannot be rolled over into the principal and continue to accrue interest.

To illustrate: In the civil loan dispute between Xu and Liu, Xu borrowed money from Liu three times and, upon settling the accounts, issued new promissory notes each time. The first loan was for 554,000 yuan at a monthly interest rate of 2%, and after repaying part of the principal, the two parties settled their accounts for the first time on August 26, 2020, adding the unpaid interest to the principal and issuing a new note for 460,000 yuan. Later, since the debt remained unpaid, they settled again on October 31, 2021, rolling over the interest into a new note for 588,800 yuan. During the trial, the court held that, at the first settlement, the interest accrued before August 20, 2020, should have been calculated according to the old judicial interpretation’s cap of 24%, while interest accrued after that date should have been calculated at four times the then-current Loan Prime Rate (LPR). After calculation, the original unpaid interest of approximately 56,970 yuan could be added to the principal, bringing the legal principal amount to 410,241.86 yuan. However, the parties had initially agreed in the first settlement that the principal amounted to 460,000 yuan—a figure clearly higher than the legal principal. Thus, the portion exceeding the legal principal was deemed invalid interest and should not have been included in the principal. Moreover, the second settlement, which resulted in a promissory note for 588,800 yuan, was based on the first settlement that already included illegal interest. Consequently, the entire second settlement document was found to be invalid. Ultimately, the court recognized only 410,241.86 yuan as the legal principal and ordered the borrower to repay this principal along with interest calculated at the legally permitted rate thereafter. The 588,800-yuan promissory note was ruled not to be protected by law. This case demonstrates that even if the lending parties voluntarily agree to roll over interest, the court will carefully examine each rollover to ensure it complies with the statutory interest rate caps. According to Article 27, Paragraph 1 of the Judicial Interpretation, the aforementioned conditions are established; Paragraph 2 further stipulates that if, at the end of the loan period, the total amount of principal and interest owed by the borrower exceeds the sum of principal and interest calculated at the statutory maximum rate based on the original loan principal, the court will not support the excess portion. This means that lenders cannot “inflate the debt” by repeatedly rolling over interest. After each settlement, the total amount of the newly formed claim must not exceed the sum of the “original principal plus interest accrued during that period calculated at the statutory maximum rate.” Otherwise, any excess portion will be considered invalid—and may even be classified as professional lending or suspected criminal activity. In other words, permitting compound interest does not equate to allowing debt to grow exponentially without limit.

For lenders, if they wish for the principal and interest to continue accruing interest after the loan term expires, the correct approach is to renegotiate with the borrower, confirm the outstanding interest amount, and re-sign the loan agreement or promissory note. It is crucial to ensure that the previous interest rate did not exceed the legal cap and that the new principal amount has not been artificially inflated beyond the statutory limits. Only under such circumstances will the portion of the new promissory note that includes accrued interest be legally recognized. Conversely, if the lender unilaterally continues to compound interest without a reasonable and lawful basis for settlement, the court will likely deem such interest invalid. For borrowers, it is advisable to pay interest on time as much as possible to avoid letting interest accumulate into the principal. If rollover occurs, borrowers should carefully verify whether the rollover amount is both reasonable and lawful. Once they discover that the lender has used rollovers to charge excessively high interest, they can raise an objection in court and request the court to adjust the interest rate according to the statutory standards. Essentially, the law permits compounding interest out of respect for the parties’ freedom of contract and established transaction practices; at the same time, however, it clearly draws a red line to prevent predatory lending practices.

According to Article 680 of the Civil Code of the People's Republic of China and Article 24 of the Judicial Interpretation on Private Lending, if a loan contract between natural persons does not specify any interest rate, the loan shall be deemed to be interest-free. In practice, many loans between friends and family are made out of goodwill and without charging interest. Under such circumstances, the lender has no right to demand that the borrower pay interest during the loan term.

It is important to note that if one of the parties to a loan contract is a corporation or other non-natural-person entity and the contract does not specify interest, then according to judicial interpretations, the interest rate may be determined by reference to prevailing trade practices or market interest rates. For example, when a corporation lends funds to an individual, it typically does not do so gratuitously; therefore, the court might hold that interest should be paid at a rate comparable to the contemporary bank loan rate. Consequently, in cases involving interest-free loans with non-natural-person participants, the lender still has some room to claim reasonable interest. However, if both parties are natural persons and no interest has been agreed upon, the lender will have no legal basis for claiming interest during the loan term—this point is quite clear.

The absence of an agreed-upon interest rate in a loan does not mean that the lender is barred from claiming overdue interest. In fact, Article 676 of the Civil Code stipulates: “If a borrower fails to repay the loan within the agreed-upon term, they shall pay overdue interest in accordance with the agreement or relevant state regulations.” Accordingly, even if the original contract stipulates that the loan is interest-free, should the borrower fail to repay on time, the lender can still, based on legal provisions, claim interest for the period during which the funds were occupied as compensation for breach of contract. This reflects the statutory punitive nature of overdue interest: regardless of whether an interest rate was originally agreed upon, as long as the borrower fails to repay by the due date, the lender is entitled to demand overdue interest. Therefore, once an interest-free loan between individuals becomes overdue, the borrower cannot argue, “Since no interest was agreed upon in the first place, I’m not required to pay interest even if I’m late.”

So, how is overdue interest calculated when no interest has been agreed upon? Article 28 of the Judicial Interpretation on Private Lending provides a clear rule: If the parties have neither agreed on an overdue interest rate nor made a clear agreement, the court may handle the situation in two distinct scenarios: (1) If neither an interest rate for the loan period nor an overdue interest rate has been agreed upon (i.e., the loan is entirely interest-free), the lender may claim that the borrower pay interest from the date of default onward, calculated based on the one-year LPR prevailing at the time, as compensation for the borrower’s default; (2) If an interest rate for the loan period has been agreed upon but no overdue interest rate has been specified, the lender may claim that the borrower pay interest for the period during which the funds were occupied, calculated at the original loan-period interest rate from the date of default onward. Simply put, for an interest-free loan that becomes overdue, interest will be calculated based on the prevailing LPR for the same period; for a loan that was originally interest-bearing but does not specify additional penalty interest, interest will continue to accrue at the original contract rate. These two approaches reflect the principle of fairness: For loans that were originally interest-free, a reasonable interest rate is set as the standard for compensating for overdue losses; for loans that were originally interest-bearing, at least the original contract rate is used to determine the compensation due for the borrower’s continued occupation of the funds.

Simply put, if a business or individual makes a living by lending money for profit—frequently extending loans to unspecified individuals at exorbitant interest rates—such lending activities will be deemed illegal financial operations, and any associated loan contracts will be invalid. Such lenders are commonly referred to as “professional loan sharks.” How can we determine whether a business or individual qualifies as a “professional loan shark”? According to the “Opinions on Several Issues Concerning the Handling of Criminal Cases Involving Illegal Lending,” issued in 2019 by the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security, anyone who, with the intent of making a profit, regularly extends loans to unspecified members of the public and thereby disrupts financial order may be prosecuted under the crime of illegal business operation (illegal lending). In civil litigation, it is not necessary to meet the criminal standard; rather, as long as it can be proven that the lender’s lending activities are regular, indiscriminate, profit-driven, and conducted without authorization, the court may find that such activities violate financial regulatory provisions, rendering the loan contract invalid. The corresponding legal consequences are as follows: The borrower need only repay the principal amount of the loan; all interest terms agreed upon by the parties shall be deemed null and void—even if the interest rate itself falls within the range permitted by law, the court will not uphold it. Consequently, the borrower is no longer required to pay excessive interest but need only return the principal plus a fee for the use of funds, thus preventing professional loan sharks from profiting excessively through judicial channels.

“High-interest lending” refers to the practice in which a borrower obtains a low-interest loan from a financial institution such as a bank and then re-lends the funds to others at a higher interest rate, thereby pocketing the interest spread. This behavior severely disrupts the order of financial credit, and its legal consequences encompass both civil and criminal dimensions:

On the civil level, the loan contract is invalid. The Supreme People’s Court’s Judicial Interpretation on Private Lending explicitly stipulates: A private lending contract involving the misappropriation of loans from financial institutions for subsequent lending is invalid. Regardless of whether the borrower (who is actually the lender) makes a profit as their primary business, as long as there is evidence of using bank funds to lend at high interest rates, the contract will be deemed invalid for violating mandatory legal provisions. Two key points should be noted here: (1) The source of the funds must be credit funds provided by financial institutions (including bank loans and loans from regulated microfinance companies, etc.); (2) The interest rate charged when lending the funds to others must be excessively high (generally understood as exceeding the bank’s loan interest rate or yielding an obvious profit margin). Even if the interest rate on the loan transferred from bank funds is not particularly high, such practice is still prohibited because it alters the intended use of the funds. In general, this provision is often used to crack down on professional “loan flipping” intermediaries and on activities involving the misappropriation of low-interest policy loans for resale and profit-making. Once a contract is declared invalid, in accordance with Article 157 of the Civil Code of the People’s Republic of China, both parties must return the property involved and compensate for any losses incurred: The borrower must return the principal actually received, while the lender (the person who re-lent the funds) must return any interest or other property obtained; if return is impossible, compensation must be made at a reduced value. The party at fault shall also compensate the other party for any losses suffered as a result. In cases of high-interest re-lending, the lender usually bears greater fault. The borrower typically only needs to repay the principal plus lawful interest, without having to pay the exorbitant agreed-upon interest. As a result, the lender’s profit-seeking behavior fails, and the lender may even be held liable for its own fault due to the contract’s invalidity.

On the criminal level, Article 175 of the Criminal Law of the People's Republic of China defines the crime of “high-interest lending,” which involves obtaining loans from financial institutions with the intent to profit from reselling them at higher interest rates. If the illegal gains are substantial, the act constitutes this crime. In practice, the subjects of this crime are rather unique—typically individuals who have no genuine need for funds themselves but deliberately borrow money from banks solely to lend it out for profit. For example, an individual might take out a consumer loan or a mortgage, extract the funds, and then lend them to others at interest rates higher than those offered by the bank. Such conduct essentially amounts to the resale of credit assets and undermines the state’s financial regulatory order.