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.