Legal Definitions - conventional interest

Conventional interest refers to an interest rate that is freely agreed upon by the parties involved in a contract or loan agreement. Unlike statutory interest rates, which are set by law, conventional interest is the result of negotiation and mutual consent between a borrower and a lender or other contracting parties.

Here are some examples to illustrate conventional interest:

• Example 1: Home Mortgage

  When a couple takes out a loan to buy a house, they agree with the bank on a specific annual percentage rate (APR) for their mortgage. This rate, whether fixed or adjustable, is the conventional interest. It's not a rate mandated by a general law for all loans, but rather a rate that the couple and the bank negotiated and consented to as part of their loan agreement.

• Example 2: Small Business Loan

  A small business owner secures a loan from a credit union to purchase new equipment. The loan agreement specifies an interest rate of 7% per year. This 7% is the conventional interest because it was a term mutually accepted by the business owner and the credit union during the loan application and approval process, reflecting their agreement rather than a rate imposed by a court or statute for that specific type of transaction.

• Example 3: Personal Installment Loan

  An individual borrows money from a peer-to-peer lending platform to consolidate debt. The terms of the loan, including the interest rate of 12%, are presented to the borrower, who then accepts them. This 12% is the conventional interest because it is the rate that the borrower and the lender (or the platform acting on behalf of the lender) explicitly agreed upon in the loan contract, forming a core part of their voluntary financial arrangement.