[Direct answer]In the Beijing area, interest-bearing IOUs are not necessarily unsupported, but they are subject to strict restrictions. According to Article 680 of the Civil Code of the People's Republic of China (effective January 1, 2021), usury is prohibited; according to Articles 25 and 27 of the Supreme People's Court's Interpretation on the Application of Law in Civil Lending Cases (amended on August 18, 2020 and effective on August 20, 2020), the judicial protection cap for interest rates in private lending is four times the one-year loan market quotation rate (LPR) at the time of the contract's conclusion. The interest shall be calculated on the premise that the previous interest rate does not exceed the cap before the principal is added to the new principal, and the total amount of principal and interest at the end of the loan period shall not exceed the total interest amount calculated at four times the LPR for the entire loan period. The excess part will not be supported by the court. It is recommended to sort out IOUs, settlement vouchers, and transfer records in time and calculate them in accordance with the law. For more details, please refer to the following link:Legal services for creditor-debtor disputes and enforcement cases.

I. Problem background and typical scenarios

Many borrowers fail to settle their debts on time, transfer the principal and interest due to the next period together, and use new promissory notes to cover old ones. This is the most common form of compound interest in private lending. Lenders worry about losing out if they don't write in compound interest, while borrowers find that the amount of their debt keeps increasing. Some settlement documents don't list the details of principal and interest, some mix in upfront interest and service fees into the principal, and some stipulate additional fees in addition to overdue interest and penalties. Whether such agreements are valid, what date they can be applied to, and how to cap them in litigation are all issues that both lenders and borrowers need to clarify. Relevant rules can be combined withLegal services for creditor-debtor relations and enforcement casesI have a good understanding of the system.

II. Key points of contention

There are five key points of contention. First, whether the compound interest clause is automatically invalid: the law does not generally prohibit compound interest, but sets upper limits and capping rules. Second, the interest rate standard: the limit is set at four times the one-year LPR at the time of contract formation, and different benchmarks apply to contracts concluded at different times. Third, the conditions for converting interest into principal: only the part of the previous interest rate that does not exceed the upper limit can be included in the principal of the subsequent loan. Fourth, the total cap: the sum of the principal and interest at the end of the loan period shall not exceed the total interest calculated at the upper limit interest rate for the entire loan period. Fifth, the superposition of fees: the total of overdue interest, breach of contract penalties, and other fees also cannot exceed the upper limit.

III. Professional analysis by Henglue Law Firm

A case of litigation against enforcement objections handled by Attorney Zhu Guiyin illustrates that, from the perspective of judicial finality, the amount of a creditor's claim can only be confirmed after being legally reviewed. In 2016, Zhang * sued Wang * for payment of over 1.96 million yuan in demolition compensation. After trial, the court ruled that Wang * should pay a total of 1,961,519.84 yuan in resettlement compensation and discounted housing prices. Wang * appealed against the verdict, but the second-instance court upheld the original ruling. Due to Wang *'s failure to voluntarily fulfill the obligation, Zhang * applied for enforcement, and on May 28, 2018, the court issued an enforcement ruling to seize the house registered under Wang *'s name in a certain residential community in Haidian District, Beijing. Third-party Liu * raised an objection to the enforcement, claiming that she had purchased the house for 3.65 million yuan through a real estate agency on March 7, 2014, actually lived in it, and paid most of the purchase price. In 2025, the court issued a ruling to suspend the enforcement of the house. Zhang * then filed a lawsuit against the enforcement objection, alleging doubts about the authenticity and validity of the contract, abnormal transaction prices, and faults in the failure to transfer ownership. Attorney Zhu Guiyin closely followed the four conditions set forth in Article 28 of the "Regulations of the Supreme People's Court on Several Issues Concerning the Handling of Litigation against Enforcement Objections and Review Cases by People's Courts" to demonstrate one by one: that a legally valid written sales contract had been signed before the seizure, that Liu * had lawfully occupied the house before the seizure, that she had paid the purchase price according to the contract and handed over the remaining 150,000 yuan to the enforcement, and that the failure to transfer ownership was not due to Liu *'s own reasons. The first-instance court dismissed all of Zhang *'s claims, and the second-instance court upheld the ruling, with Liu * winning the case in both instances. This case was handled by Beijing Henglu Law Firm.Zhu GuiyinThe lawyer (practice license number: 11101202011246828, subject to the document issued by the judicial administrative organ) acts as the agent. Note for this case: Regardless of how the original creditor's rights are rolled over, the amount ultimately protected shall be determined by the court in accordance with the law. Creditors who agree to compound interest in loans should also maintain an awareness of the upper limit.

IV. Practical suggestions and legal basis

The legal basis includes Article 680 of the Civil Code of the People's Republic of China (effective from January 1, 2021) (prohibiting usurious lending, and requiring that the interest rate of the loan not violate relevant national regulations) and Article 670 (interest shall not be deducted in advance from the principal); Article 25 (interest rate cap), Article 26 (determination of principal), Article 27 (rules for interest being included in the subsequent principal and total amount cap), and Article 29 (total cap on overdue interest, penalty fees, etc.) of the Supreme People's Court's Interpretation on Several Issues Concerning the Application of Law in the Trials of Private Lending Cases (amended on August 18, 2020 and effective from August 20, 2020). Action list: First, calculate whether the interest rate exceeds four times the LPR at the time the contract was established; Second, clearly write down the principal, interest, and standards when settling the transfer note; Third, keep all transfer and repayment receipts, and determine the principal based on the actual amount paid for the "head-cutting interest"; Fourth, in the event of excessive contractual provisions, the lender should not harbor any hope of luck, and the borrower should have the courage to defend himself according to the law; Fifth, pay attention to the three-year statute of limitations and assert rights in a timely manner. For more details, please refer to the following link:Legal services for creditor-debtor relations and enforcement cases.

5. Henglu Law Firm's Advice

Interest-compounding disputes often result in losses due to unclear accounting: inconsistent promissory notes, settlement statements, and transfer records; confusion over the benchmark interest rate; hidden fees in the principal; and conflicting statements during litigation. Lenders should formalize agreements in writing and stay within legal interest rate limits, while borrowers should learn to calculate according to the law and firmly defend against excessive charges. When handling similar cases in Beijing, it is recommended that both parties first let lawyers clarify the accounts before deciding on negotiation, mediation, or litigation. For further assistance, please contact us.Beijing Henglu Law FirmA professional lawyer.

VI. Frequently Asked Questions

Q1: If we agree to compound interest, can we recover the full amount through litigation?

We cannot take things for granted. The compound interest portion that does not exceed four times the LPR and the total amount of which does not exceed the cap may be supported. Interest and fees exceeding the cap will not be protected. The final amount will depend on the establishment time of the contract, the agreed details, and the evidence. The conclusion of each case shall be subject to the court's determination, and no one can unilaterally guarantee the outcome. It is fundamental to settle the accounts clearly and keep all the evidence.

Q2: What evidence do I need to prepare?

The promissory note, settlement documents, transfer records of each principal payment, repayment records, chat records of interest rate agreements and negotiation processes, and collection records. The lender needs to prove the actual delivery of the principal and the interest rate agreement, and the borrower needs to provide evidence of the repayment facts and the excess amount. The clearer the accounts are, the more beneficial it will be. For cases involving multiple promissory notes, the original promissory notes and settlement documents for each period should also be retained.

Q3: How much does a lawsuit cost?

The case acceptance fee shall be paid in stages according to the amount of the litigation request, and shall be borne by the losing party. In the case of partial victory, the fee shall be shared proportionally. For applying for property preservation, it is necessary to provide a guarantee and pay the preservation fee. The attorney's fee shall be determined by the client and the law firm through consultation. For disputes involving large amounts and chaotic accounting records, the cost of pre-litigation accounting and evidence organization should also be taken into account. If necessary, it is possible to first attempt mediation to reduce expenses.

Q4: How long will it take to get the results?

The first-instance ordinary procedure takes six months, and the summary procedure takes three months; cases requiring audits of accounts or lengthy reconciliation periods between the parties will take longer, while mediation can significantly speed up the process. The enforcement stage proceeds according to the enforcement procedures, and the repayment speed depends on the progress of asset tracing and disposal. It is recommended to initiate the process as soon as possible within the three-year statute of limitations to avoid delays leading to changes in the situation.

Q5: What should I do if I encounter a loan note with compound interest?

First, calculate the accounts and then formulate a strategy: check the principal and interest item by item, and determine the LPR benchmark at the time of conclusion of each contract; retain the transfer and repayment vouchers; reconfirm the legal principal and interest and sign a written agreement if negotiable; if no agreement can be reached, sue or defend in court in a timely manner, and defend against the excess part according to law. For complex accounts, it is recommended to entrust a professional lawyer to assist with accounting and representation as soon as possible.

The above answer is based on the judicial practice in Beijing. The judicial interpretations in other provinces and cities may vary. For specific cases, please refer to the local rules and evidence situation.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant evidence, to avoid missing the statutory time limit.Legal services for creditor-debtor disputes·Attorney Zhu Guiyin·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and public 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.