Interest on late payment
The default interest is those that apply a percentage or an increase, on a reference rate, in the debit amounts and in proportion to the time elapsed until the payment of the debt.
These interests are usually applied to delays in payment to public administrations and also to other debts contracted with individuals or companies.
Its difference with the ordinary interest rate is that the default rate is calculated only on the time elapsed since the default and the percentage is usually higher. In addition, in most countries it is regulated by a standard.
The problem of default interest
The lender, on the one hand, has the right to collect a certain amount, which in turn is calculated by a method agreed by both parties. The reason for being is to compensate you for the breach of the contract due to non-payment.
The same happens with public administrations, only in this case there is a unilateral imposition that the citizen must accept.
Now, the problem comes because there is another part that can be considered weak. Estes is the borrower, in the case of a bank loan, or the citizen, in the case of a public administration. For this reason, these late payment interests are regulated in most countries of the world. The maximum percentage to be applied or directly the rate to be used is specified by law.
Default interest in the world
It would be impossible to show world legislation in this regard here. But we are going to see some peculiarities about its regulation in several countries:
- In Spain, the General State Budget Law establishes the legal reference interest (3% in 2020). From this, default interest is calculated for the administration (25% more). On the other hand, for a mortgage it will not be able to exceed that legal interest three times and for a personal loan it will be the remunerated interest plus two points.
- In Mexico, the default interest on loans is calculated on what had to be paid at the time and not on the total debt. Something that happens in most countries. The regulation that regulates it requires certain conditions such as that the debt is past due or that it has been previously agreed by the parties. Also, set the maximum caps.
- In Colombia there is a usury rate that is a legal maximum limit. Above this, default interest cannot be charged. For 2020 it is 27.18% for ordinary and consumer credit, 41.24% for microcredit and 51.27% for small-amount loans.
- The default interest rate in Ecuador is issued by the board of its central bank. A series of percentages are established for their calculation up to a maximum limit. In this way, banks can choose one or the other depending on the solvency and good work of the client in question.
Example of default interest
In closing, let's look at some examples of default interest. One from a debt with the administration, another from a mortgage and another from a personal loan. Let us take Spanish legislation as a reference, although it can be extrapolated to any other. The cases would be the following:
- A debt with the administration for two years for the amount of 10,000 currency units (CU), with a statutory interest for 2020 of 3% and an increase of 25% for interest on arrears, according to current regulations. It would be calculated as follows: 10,000 * 0.03 * 0.25 * 2 = 750.
- A mortgage, of the same amount, of which we owe a fee and the fixed interest rate is 4%. The default interest is the maximum allowed (3 times the legal interest). We count 60 days as time in arrears. Here we would have two parts, the 30 ordinary days of the installment and the 60 days of default: (10,000 * 0.03 * (30/360)) + (10,000 * 0.03 * 3 * (60/360)) = 175.
- Finally, let's imagine a loan with an agreed interest of 6%. The payment is monthly and is considered delinquent as of the second month. We apply the maximum allowed (6% + 2% = 8%). It would be calculated: (10,000 * 0.06 * (30/360)) + 10,000 * 0.08 * (30/360) = 116.66
As we can see, the default interest depends on the regulations of each country. But normally it is either a fixed percentage or an increase on a reference rate. Therefore, the calculation is relatively simple. As the interest rate is annual, the elapsed days must also be expressed in annual computation, dividing by those with a business year, 360 days.