Unfair Interest Rates May be Legal in Utah, but an Attorney Can Help

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Utah judges aren’t your parents. If you enter a contract that is unfair or unwise, a judge probably won’t come sweep in and save you from the consequences of the agreement. It has long been the law in Utah that you have “freedom to contract.” You are free to enter a contract, reject a contract, or negotiate different and more favorable contract terms. With this freedom comes the right to enter into a contract that is wholly unreasonable or that will lead to great hardship. It doesn’t matter if the other party greatly benefits at your expense. You will likely be bound to the consequences of your contract.

This freedom to agree to be bound to unreasonable contract terms generally extends to interest rates. Utah statutes clearly state that a party to a contract can agree to any rate of interest it chooses. This rule generally applies to business contracts as well as consumer contracts with individuals. So, if you enter a loan over 30% or 40% interest, you may be bound to pay this incredibly high rate. Sometimes, however, an interest rate in a contract might not be enforceable, or there may be other ways to avoid paying accrued interest.

This post discusses when an interest rate may be unenforceable, when a contract containing a high interest rate might not be legal, and what somebody can do—with the help of an attorney—to avoid paying outrageous interest rates.

Unconscionable Interest Rates Not Enforceable

Although most contract terms are enforceable, contracts or contract terms are not enforceable if they are unconscionable. A number of factors may show unconscionability, such as the absence of a meaningful choice on contract terms. Often, one party has superior bargaining power and can exert this power improperly. Perhaps one party was uneducated or illiterate and was therefore exploited. Maybe he or she did not understand a contract term because it was written in “legalese,” which normal people may not understand. Maybe the term was hidden in fine print or is part of set “form” terms that cannot be negotiated. The contract may be so one-sided that it oppresses or unfairly surprises an innocent party—maybe through an extraordinarily high interest rate, for instance.

While these and other factors may support a conclusion that a contract or a contract term is unconscionable, most people cannot escape a contract by claiming unconscionability. Unless you are elderly, illiterate, an immigrate who does not understand English (the language of the contract), or have some other limitation that suggests unconscionability, Utah law may likely be quite unforgiving to you. Again, whether a contract term is unfair or foolish, and whether it will cause great hardship, are issues a person must determine before signing a contract. Parties have freedom to contract and should seriously consider contract terms at the time a contract is made. If an interest rate is extremely high, be sure you can pay if before moving forward.

Although each case is different, Utah laws and courts have enforced relatively high interest rates. For example, consumer interest rates over 20% per annum may be clearly enforceable, and interest rates of 40% per annum in business contracts may also have teeth. Especially between sophisticated parties in commercial transactions, many people believe that high interest rates are good for our economy. Without high risk capital secured at high interest rates, certain enterprises—especially those with untested products or new ideas—would be hindered. Investors need higher interest rates to invest in riskier businesses.

Interest Only Valid on Legal Contracts

Generally, a contract in Utah is legally enforceable if the two parties agree on all the key elements of the contract. They form what is called a “meeting of the minds.” One party offers and the other party accepts the same basic terms. Some contracts, however, are not enforceable despite what may appear to be a valid agreement. A contract formed as a result of fraud, duress, undue influence, or mistake is not legally enforceable. If the contract is not enforceable, neither party is bound to the terms of the contract, including an interest rate.

Fraud is based on, as expected, a false representation that forms the basis of the contract. For example, if somebody induces a buyer to purchase a product by falsely claiming the product is made of a certain material, the contract is likely invalid. Stated otherwise, there probably wasn’t a meeting of the minds on the nature of the product that was purchased. Any interest rate accompanying such a sale agreement would be unenforceable, obviously.

Duress can also invalidate a contract and any accompanying interest rate. A party enters an agreement under duress based on an improper threat that is so compelling that the party believes there is no reasonable alternative but to agree to the contract. An obvious example of duress is threatening to beat a person senseless if he or she does not agree to a contract. Similarly, undue influence means that a party did not enter an agreement freely.

Mistake also invalidates a contract and relieves a party from being bound to an agreed-upon interest rate. Mistake can be mutual or unilateral. A mutual mistake means that both parties were wrong about a very important term of a contract. For instance, perhaps both parties to a real estate contract believe that a piece of agricultural land can be developed into residential lots, but they are wrong. This mistake may invalidate the contract, especially if both parties know that the purpose of the sale is to develop residential lots. A unilateral mistake is when only one party is mistaken, and the other party knows of this misunderstanding. In the above example, if the seller knows that the lot cannot be developed into residential lots and also knows that the other party does not know this, a unilateral mistake occurred that can invalidate the contract (and any accompanying interest rate).

The Law May Be Tough, But Attorneys Can Be Tougher

It is true. Utah’s laws on interest rates are unforgiving. This does not mean, however, that every contract with high interest rates presents an insurmountable problem. If a skilled attorney uses the right pressure points, a creditor may back down and not enforce a contract fully, including an excessive interest rate. The attorney may help the creditor see problems with the contract that encourage it to settle for less than is owed. As explained above, there are many laws that may affect the enforceability of the contract, in addition to consumer laws that further govern. A skilled attorney will analyze the unique provisions and circumstances surrounding your contract and advise you on the best path moving forward.

Also, a creditor is interested in getting paid back, and it may take as much as it can get. Quick payment at a discounted rate may motivate a settlement. Bankruptcy wipes out most debts and can be used as a negotiation tool to leverage a better settlement. Sometimes an extended payment plan may be appropriate for all people involved in a contract. In short, a qualified attorney will be a tough negotiator who can encourage a more favorable outcome than strict enforcement of contracts with excessive interest rates.

If you need help enforcing a contract or if you need assistance in avoiding a contract with a high interest rate or some other unfavorable contract term, we would love to assist you. 

Skoubye, Nielson, Johansen Attorneys Salt Lake City Utah

If you need help or would like to speak with an experienced attorney, please call (801) 365-1030 or click here to contact us.