[Direct answer]In the Beijing area, where interest is deducted from the principal in advance, the actual amount lent shall be deemed as the principal. According to Article 27 of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases" (amended in 2020 and implemented on August 20, 2020), the amount of the loan specified in creditor's vouchers such as promissory notes, receipts, and IOUs shall generally be deemed as the principal. Where interest is deducted from the principal in advance, the people's court shall determine the actual amount lent as the principal. That is to say, if the promissory note states 100,000 yuan but the actual amount received is 90,000 yuan, the interest shall be calculated on the basis of 90,000 yuan as the principal. Evidence shall be based on actual payment: when the transfer records and bank statements do not match the creditor's vouchers, the court usually determines the principal based on the actual payment amount. In addition, if the deducted portion, together with the agreed interest, exceeds four times the upper limit of the LPR, the excess portion shall not be protected either.

I. Problem Background and Typical Scenarios

"Borrow 100,000 yuan, deduct 10,000 yuan as interest first, leaving 90,000 yuan for the borrower to use. When the loan matures, the borrower must repay 100,000 yuan" is a common "upfront interest" arrangement in private lending. Borrowers often repay the amount specified in the IOU, but actually bear an interest rate far higher than the apparent one. There are also cases where fees such as service charges, consultation fees, and deposit charges are deducted in advance, but these are still essentially upfront interest. It is necessary to identify these fees through their names to determine whether they constitute upfront interest.

II. Key points of contention

First, the identification criteria and scope of upfront fees. Second, whether withholding fees under various pretexts constitutes upfront fees. Third, the determination of principal and methods of evidence collection. Fourth, how to recalculate payments made based on the amount specified in the promissory note. Fifth, the relationship between upfront fees and interest rate caps.

III. Professional analysis by Henglue Lawyers

Henglue Law Firm analyzed the practice of lending. Firstly, regarding the identification standard: If the lender deducts interest or other fees in advance when delivering the loan, resulting in the actual amount received by the borrower being less than the amount specified in the creditor's certificate, it constitutes a "cut-head interest"; if it is labeled as "service fees", "intermediary fees", or "deposits", as long as it is essentially a pre-deduction, the actual lending amount shall be recognized as the principal. Secondly, regarding the method of evidence: The court shall determine the amount based on the actual delivery. The borrower shall submit transfer records, bank statements, receipts, etc. to prove the actual amount received; if the lender claims full payment, the lender shall bear the burden of proof for cash delivery, etc. Thirdly, regarding the recalculation: If the borrower has repaid the loan based on the inflated principal, the borrower may claim to offset the overpaid amount against the principal or request a refund, which shall be determined based on the repayment records. Fourthly, regarding the relationship with the cap: Cut-head interest often results in a significant increase in the real interest rate. If the calculated interest rate exceeds four times the one-year LPR at the time of contract formation, the excess portion shall not be protected, and the borrower may raise objections based on this. Fifthly, regarding the risk warning: If the lender lends money by using cut-head interest and repeats this practice, the lender may be regarded as a professional lender, and the validity of the relevant contracts and interest claims will be affected. Both parties should operate in accordance with regulations.

IV. Practical suggestions and legal basis

Action suggestions: First, check the amount of the IOU against the actual amount received, and keep the transfer receipts and transaction records; Second, in the case of withholding funds under the guise of fees, claim that the principal should be determined based on the actual amount lent; Third, calculate the real interest rate, and refuse to pay or claim offsetting for the part exceeding four times the LPR cap; Fourth, submit complete repayment records when negotiating or litigating. For private lending and debt disputes, you can refer to the relevant provisions of the Civil Code and other laws and regulations.Creditor's rights and debts, and enforcementFor cases involving financial loans, you can refer to the following materials for reference:\nFinancial capital and cross-border transactions involving foreign entities.Legal basis: Articles 25 and 27 of the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trials of Civil Loan Cases" (amended in 2020 and implemented on August 20, 2020), and Articles 670 and 679 of the "Civil Code of the People's Republic of China" (both implemented on January 1, 2021). The specific application shall be subject to the currently effective laws, regulations, and judicial rulings.

5. Henglue Law Firm's Reminder

Firstly, the lender should calculate the principal based on the actual amount borrowed, rather than requiring the borrower to repay the full amount as stated in the promissory note. Secondly, various pre-deduction fees should also be considered as hidden interest. Thirdly, the transfer records are the most convincing evidence. Fourthly, the borrower can claim to offset or return the overpaid amount. For disputes involving hidden interest and loan accounting, the borrower can seek legal assistance through legal channels.Creditor's rights and debts, and enforcementWe provide comprehensive solutions for services, and those involving financial loan disputes can be integrated into our services.\nFinancial capital and cross-border transactions involving foreign entities.For reference, you can check the sections related to corporate financing and contractsBusiness and contract disputes in enterprisesFor any questions regarding difficult situations, please feel free to consult us.Special servicesTeam.

VI. Frequently Asked Questions

Q1: Is it legal to deduct interest from a loan first?

The arrangement of withholding interest will be regarded as a predatory interest rate. According to the law, the principal is determined by the actual amount of the loan. Therefore, this arrangement itself does not have the effect of charging interest based on an inflated principal. The borrower only needs to pay interest based on the actual amount received.

Q2: How can we prove that it's a hidden fee?

Submit the transfer records and bank statements to prove that the actual amount received is less than the amount stated in the IOU; if the other party claims that the cash was supplemented, they should provide evidence of the delivery. The clearer the evidence is, the more favorable the determination of the principal will be.

Q3: What should I do if I've already repaid the inflated principal amount?

You can claim to offset the principal with the overpaid amount or request a refund. You need to organize the complete repayment records and receipts, calculate the actual principal and legal interest, and if no agreement can be reached, you can assert your rights through litigation.

Q4: Is the service fee considered a hidden fee?

If the borrower's money is deducted in advance when the loan is delivered, and it is essentially interest or disguised interest, it will generally be treated as a "head-cutting interest", and the actual loan amount will be determined as the principal. The name of the loan does not affect the substantive determination of the loan amount.

Q5: Is the prepayment penalty related to the interest rate cap?

This is relevant. The upfront interest rate will increase the real interest rate. If, after calculation, it exceeds four times the one-year LPR at the time of the contract's establishment, the excess part will not be protected. Borrowers can use this to argue and request a recalculation according to the legal upper limit.

This article is written based on the common judicial interpretations in the Beijing area. If the case occurs in other regions, it is recommended to consult local lawyers to verify the regional differences.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, to avoid missing the statutory time limit. →\nLegal services for creditor-debtor disputes·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and open adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If you encounter disputes, please consult a practicing lawyer in time.