What is interest capitalization?

When a debt is not paid in the established time, the interest generated is added to the amount owed, so the debt becomes greater as well as the new interest payable.

This accumulation process is what is known as capitalizing interest. Do you want to know more about what interest capitalization is?

Unpaid interest to the debt might seem inconvenient

Unpaid interest to the debt might seem inconvenient

Although this matter of adding the unpaid interest to the debt might seem inconvenient, understanding that if the person did not make the payment because it is a large amount now less likely they will have to pay, the case is that it is a practice covered by the law .

What is interest capitalization and what is its legal basis?

What is interest capitalization and what is its legal basis?

The sum of interest not paid on the debt is based on the following legal instruments:

  • Civil Code: Article 2397 states that overdue interest accrues a legal interest. That is, it authorizes a capitalization of interests automatically.
  • Commercial Code: Article 363 grants freedom to the parties to agree on the possibility of capitalizing overdue interest not paid. In the case of the commercial loan, article 363 of the Commercial Code provides that “Interest due and not paid will not accrue interest. The contractors may, however, capitalize on them . ”

Therefore, the laws distinguish this process depending on whether it is a civil or commercial loan. This freedom of the parties to agree on the capitalization of interests may lead to an agreement in the case of commercial loans where this `cumulative process is not carried out.

What are the aspects to consider according to these legal provisions?

What are the aspects to consider according to these legal provisions?

The most important thing to know what is the capitalization of interests are the following aspects to consider:

  • In civil loans and without the need to be specified prior to the contraction of the debt, once the legal claim is made, the overdue interest begins to add to the amount of the debt.
  • When you decide to apply for a commercial loan, check whether the agreement to add unpaid overdue interest to the debt is established.