Businesses may charge interest on late payments to help offset some of the problems caused by delinquent accounts. Late payments can create cash flow problems for a business as well as expose the business to non-payment risks. Both issues look negative on a balance sheet and can hurt an organization, especially when seeking investments or funding from outside sources. Policies for charging a customer interest on late payments or for demanding a late fee can vary among organizations. In general, however, the interest charged is usually retroactive to the due date, compounded monthly, and charged in the next billing cycle.
Although businesses have a right to charge interest on late payments, there are rules they have to follow. Disclosure of the rate of interest once the customer opens an account but before he or she is charged any interest related to a late payment is one such requirement. All late fees or interest charges for late payment must be outlined in a fee schedule and provided to the customer. Most legal definitions dictate the amount of interest charged for a late payment must be reasonable, but does not usually specify an allowable amount. Some states, however, do cap the amount of interest that can be charged for late payments on an annual basis.
Additionally, organizations usually cannot charge a late fee or interest on a payment received within 14 days after a statement is mailed to a consumer. Therefore, companies usually make it a point to send out statements well in advance of the due date to ensure timely notification. Some organizations may offer a grace period as well before customers are charged interest on late payments. Consumers need to refer to their initial agreement or contact their creditor to find out if a grace period applies to any payment that might be late.
For credit consumers, it is important to note that not only will they be charged interest on late payments, or even late fees, but there are also other consequences. Late payments can hurt credit scores, and, if consistently delinquent, may cause the lender to raise the overall interest rate on the credit account. Debtors who remain behind on an account run the risk of the lender closing the account and demanding full payment. Before a creditor resorts to such circumstances, he or she will often attempt to negotiate with the debtor to bring the account current. Dealing with such circumstances, sometimes creditors are willing to waive late fees and interest charges for late payments, in order to bring the account current.