A consumer loan agreement is defined in Article 623 of the Georgian Civil Code: the lender transfers money or another generic thing into the borrower's ownership, while the borrower undertakes to return a thing of the same kind, quality and quantity. The law nevertheless regulates the form of the contract, caps interest rates, limits penalties and restricts the currency of smaller loans — limits every clause deserves to be checked against. Below we set out the key statutory boundaries that apply to consumer lending.
Form of the Agreement
A loan agreement is concluded orally, and a written form may be used by agreement of the parties, as established by Article 624 of the Civil Code. Where the agreement is oral, its authenticity cannot be established solely by witness testimony. For mortgage-secured loans the agreement must indicate the monthly interest rate agreed by the parties.
Statutory Limits on Interest Rates
Interest for the loan may be agreed between the parties, but the law sets a clear boundary: the annual effective interest rate of the loan must not exceed 50 percent. For mortgage-secured loans, the monthly interest rate indicated in the agreement, including the costs associated with using the loan, must not exceed one twelfth of 2.5 times the arithmetic mean of the market interest rates of loans issued by commercial banks, as published monthly on the official website of the National Bank of Georgia for the previous calendar year, in force from 1 March of each year. The requirement also covers the annual amount of the agreed monthly rate, while calculation details are defined in the National Bank's legal acts.
Penalties and Financial Sanctions
The financial burden attached to a loan is limited by several statutory caps. Upon issuance, any commission, financial charge, penalty or any form of financial sanction must not exceed 0.27 percent of the outstanding principal for each day. During an overdue period, a one-off penalty of not more than 20 GEL is not counted towards this limit. However, for each overdue payment, the total of such charges until the overdue is fully remedied must not exceed 1.5 times the current outstanding principal. Charges collected in excess of these caps are open to challenge. In practice, the check starts from the payment schedule: each charge is compared with the outstanding principal on the relevant date, which requires the full history of the account.
Currency Restriction and Early Repayment
Unless Georgian legislation provides otherwise, a loan of up to 200 000 GEL must be issued only in Georgian lari, except where, as a result of the issuance, the borrower's aggregate obligations to the same lender exceed 200 000 GEL. A loan linked to or indexed by a foreign currency in any form is not considered a loan issued in lari. Early repayment is protected too: on refinancing or early repayment with the consumer's own or a third party's funds, a commission or sanction exceeding 2 percent of the outstanding principal is prohibited.
Repayment Terms
If no repayment date is fixed, the debt must be returned upon termination of the agreement by the creditor or the debtor, and the termination notice period is three months. If no interest has been promised, the debtor may return the debt before the due date; early return of an interest-bearing loan is allowed only by prior agreement of the parties or with the lender's consent. Interest must be paid after the end of each year, and for a loan defined for a fixed term both the debt and the interest must be paid when the term falls due. The lender may instead demand immediate repayment where the borrower's financial condition substantially deteriorates and endangers the return of the loan.
Frequently Asked Questions
The questions below are the ones borrowers raise most often.
How high may the effective interest rate be?
The annual effective rate must not exceed 50 percent; the monthly rate of a mortgage-secured loan has a separate cap based on market rates published by the National Bank of Georgia.
What limits apply to penalties during an overdue period?
The daily financial burden must not exceed 0.27 percent of the outstanding principal, and a one-off penalty must not exceed 20 GEL. For each overdue payment the aggregate of such charges must not exceed 1.5 times the current outstanding principal.
May a loan be issued in a foreign currency?
A loan of up to 200 000 GEL must be issued only in lari, unless the borrower's aggregate obligations to the same lender exceed that amount. A loan linked to a foreign currency is not considered as issued in lari.
What does early repayment cost?
On refinancing or early repayment with the consumer's own or a third party's funds, an early repayment commission or sanction exceeding 2 percent of the outstanding principal is prohibited.
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