Interest rates on issued loans are about to rise

In Irkutsk, banks began warning borrowers of possible rate hikes on already issued loans, and Svyaz Bank was first to report this. Lawyers say it will be hard to challenge such a change in court if the bank's right to change the rate was in the contract, so borrowers are advised to first try to negotiate with the lender. Experts also remind, before signing a loan agreement, it is important to read all terms carefully, especially those on rate changes.

In Irkutsk, the first reports have appeared of an impending increase in bank interest rates on loans already issued. The possibility of changing the rate unilaterally is stipulated in the loan agreement, so those who signed such an agreement are unlikely to be able to challenge the lender’s actions in court, lawyers say. Experts advise first trying to negotiate with the bank, and potential borrowers to carefully read the terms of any agreement they sign.
The first bank in Irkutsk to announce an upcoming increase in rates on issued loans was Svyaz-Bank: in November it sent its clients who had taken out consumer loans and car loans a notice of a rate change effective January 1, 2009. At the end of December, by order of the bank’s head office, the change in terms on issued loans was postponed to March 1, 2009. The expected rate increase will be 2 percentage points. If borrowers do not agree to the new terms, they will be offered early repayment of the loan before the new rates take effect.
The possibility of changing the loan rate unilaterally is stipulated in the loan agreements of most banks operating in the retail lending market of the Irkutsk Region. Experts do not rule out that other lenders may also make use of this clause in the near future.
Head of the Consumer Rights Protection Department of the Consumer Market Committee of the Irkutsk City Administration Viktor Nizovtsev reminds that "a credit agreement is essentially an adhesion contract, since its terms are formed by one party (the lender)." He refers to Article 428 of the Civil Code, which states that the adhering party has the right to demand termination or amendment of the contract if it contains terms burdensome to it, "which it would not have accepted, based on its reasonably understood interests, had it been able to participate in determining the terms of the contract".
However, paragraph 3 of the same article of the Civil Code states: "A demand for termination or amendment of the contract shall not be granted if the adhering party knew or should have known on what terms it was entering into the contract".
At the same time, lawyers note, many borrowers, if they do not read the loan agreement in full before signing it, certainly remember signing at the end of the document next to the wording "I have read the terms of the agreement".
Overall, lawyers agree that a borrower’s chances of challenging in court a bank’s unilateral increase in the loan rate are slim. There are as yet no such precedents in Russian judicial practice. True, the deputy chairman of the public organization for the protection of consumers of financial services "Delfin" Alexey Chebunin recalled that "in 1999, Article 29 of the law 'On Banks and Banking Activity,' which allows a bank to stipulate in the contract its right to unilaterally change the rate under an already concluded agreement, was recognized at a Constitutional Court session as unconstitutional." But that case concerned a deposit agreement. "It is possible that such a precedent may also arise in relation to a loan agreement," the lawyer believes.
Borrowers rarely try to challenge bankers’ actions in court, because in the event of an unfavorable decision, legal costs fall on the borrower. Much more often, clients try to negotiate with lenders.