Compound interest in bank loans: a missing daily rate does not automatically rule out capitalization

In business bank financing, one question comes up often: if the contract provides for daily capitalization of interest but does not expressly state the daily rate, should compound interest be replaced by simple interest? Brazil’s Superior Court of Justice (STJ) said no.

In the case under review, the bank contract expressly provided for daily capitalization and clearly stated the effective monthly and annual rates, as well as the amount financed, the number of installments, the installment amount and the total debt.

Under those conditions, the absence of the daily rate, by itself, was not considered enough to rule out compound interest.

The issue must be seen for what it is. The effective annual rate, the monthly rate and the daily rate are not three different financial transactions. They are ways of expressing, over different periods, the same interest regime.

If the contract clearly provides for the capitalization of interest and states the relevant effective rates, compound interest cannot simply be replaced with simple interest to reduce an expressly agreed obligation.

The decision directly concerns companies that take out loans, financing, working capital and bank credit.

Before taking credit, business owners should not look only at the advertised monthly rate. They need to check the effective annual rate, how often interest is capitalized, the amount of each installment, the total cost of the financing and the rules for early repayment.

A lawsuit seeking review of a bank contract and abusive interest may, of course, exist, but the mere absence of the daily rate does not automatically turn compound interest into simple interest when the rest of the contract is clear.