What is anatocism?

Anatocism is the practice of charging interest on previously accrued interest on a debt.

In technical terms, the accrued interest becomes part of the principal; this process is called "capitalisation". This means that the accrued interest is added to the original amount owed and itself begins to generate interest. This is called compound interest.

Example

  • 1 January 2025: A customer owes the bank €1,000 (the principal), which earns interest at a rate of 1% per year.
  • 31 December 2025: The total amount owed is €1,010 - made up of €10 interest plus the original €1,000 principal.

At the start of the following year, the €10 interest is added to the principal. So:

  • 1 January 2026: The new principal is €1,010.
  • 31 December 2026: If conditions remain unchanged, the debt will generate €10.10 in interest, bringing the total owed to €1,020.10.

The extra €0.10 represents the interest earned on the €10 that was added to the principal at the end of the previous year.

The prohibition of anatocism

It's important to understand what anatocism is and even more important to know that, for all banking transactions, the rules introduced on 1 October 2016 prohibit any form of interest being charged on interest owed by the customer to the bank.

These rules do not affect interest on arrears, which applies when a customer fails to make a payment by the date agreed in the contract (for example, missing a mortgage or loan repayment). In such cases, the calculation and payment of interest continue to follow the terms of the contract and the provisions of the civil code.

How interest works in current accounts

The holder of a current account can deposit money as well as use credit provided by the bank (such as an agreed overdraft).

Therefore, when we talk about interest, we refer to

  • Credit interest (or active interest): interest earned by the customer on deposited funds (positive balance); and
  • Debit interest (or passive interest): interest owed by the customer for using funds made available by the bank.
For these banking operations - where the credit relationship is managed through a current account - the generation of interest is subject to specific rules.

To learn more, explore our in-depth resources.

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