Unfair terms allowing an interest rate increase in a bank loan agreement

Under Article 143 of the Bulgarian Consumer Protection Act, a term is unfair if, to the detriment of the consumer and contrary to the requirement of good faith, it causes a significant imbalance between the rights and obligations of the trader or supplier and those of the consumer. The Act gives a non-exhaustive list of circumstances in which such an imbalance may arise. These include terms allowing the trader or supplier to change the contract unilaterally on a ground not specified in it (item 10), and terms allowing the trader to increase the price without giving the consumer the right to withdraw if the final price is significantly higher than the price agreed when the contract was concluded (item 12).

Article 144 provides exceptions to Article 143(1), items 10 and 12, for financial services. A bank loan agreement is such a service under § 13, item 12, of the supplementary provisions. In this context a term allowing a bank to increase the initially agreed interest rate must meet certain conditions: (1) it must set out clearly and in intelligible language the circumstances in which the rate may change; (2) these circumstances must be objective, independent of the lender’s will and attributable to market forces or action by a public regulator, or both. The lender cannot then be regarded as acting in bad faith simply because the rate changes, since the change is outside its control; (3) the contract or its general terms must specify clearly and in detail how interest is calculated and which components determine a change; (4) the method must allow the rate to fall as well as rise.

Terms that permit only an increase in the agreed interest rate create a significant imbalance between the parties’ rights under the loan agreement and place the borrower in a significantly less favourable position.

This article does not provide a legal opinion or advice about any particular person or situation. For help with a loan agreement or a change to the terms of a contract with a bank, consult a lawyer practising in civil or commercial law.