Interest fee

Back to Basics, Continued — The Difference Between Late Fees and Interest | Denton

There is a common misunderstanding about late fees and interest.

Often, a contract provides for late fees as a contractual clause in the event of failure to meet the repayment obligation. Unfortunately, the language too often used to express such charges is ambiguous — it does not mean that they are contractual late charges. For example, the language might be stated as “1.5% per month for non-payment”.

However, there is a real difference between “late fees” and “interest”.

“Late fees” are a contractual obligation in the event of non-compliance with the agreed repayment term. For example, if a contract grants a grace period of 10 days and provides for late fees if payment is not made within that period, this is a contractual agreement in the nature of liquidated damages for non – compliance with the contractual obligation to reimburse on time. .

“Interest” is the agreed charge for a party’s contractual right to defer payment for a period of time and incur costs for exercising that right.

Is it a distinction without difference? Well, depending on state law relating to “late fees” and “interest,” this distinction can be significant.

Practice pointer: If your consumer transaction documents are unclear on this point, you may want to go back to the drawing board.