Rates applicable after default: Overview, definition, and example
What are rates applicable after default?
"Rates applicable after default" refer to the interest rates or fees that are applied to an account or debt once the borrower or party has failed to meet their obligations, such as missing a payment or breaching the terms of a contract. These rates are often higher than the standard rates and are meant to act as a deterrent against default and to compensate for the increased risk to the lender or other party involved.
For example, if a borrower fails to make a payment on a loan by the due date, the loan agreement may specify that a higher interest rate will apply to the remaining balance after the default. This serves as a penalty for not meeting the agreed-upon terms.
Why are rates applicable after default important?
These rates are important because they provide an incentive for parties to adhere to the terms of their agreements and discourage default. By specifying higher rates for defaults, businesses can help protect themselves from the financial risks associated with late payments or breaches. They also help ensure that the party responsible for the default pays for the extra risk they impose.
For businesses lending money or providing credit, clearly outlining the default rates in the contract helps manage risk and ensures that they can recover some of the costs associated with late payments.
Understanding rates applicable after default through an example
Let’s say a company lends $10,000 to a client with an interest rate of 5% per year. If the client misses a payment, the agreement states that a higher rate of 10% will apply to the remaining balance. After the default, the company will apply the 10% rate to the loan balance instead of the standard 5%, resulting in higher interest charges for the client. This provides an incentive for the client to pay on time and compensates the lender for the extra risk caused by the missed payment.
In another example, a supplier provides goods on credit, with payment due within 30 days. If the customer doesn’t pay within that period, the supplier’s contract may specify that late payment fees will be applied, such as an additional 2% charge for each month the payment is overdue.
An example of a rates applicable after default clause
Here’s how a clause like this might appear in a contract:
“In the event of default, the Parties agree that the outstanding balance shall bear interest at a rate of [X%] per annum, which is higher than the agreed rate, starting from the date of default until the outstanding balance is fully paid.”
Conclusion
Rates applicable after default ensure that businesses are compensated for the risks and costs associated with late payments or breaches. By clearly outlining these rates in contracts, businesses can encourage timely payments and protect their financial interests. For the party at fault, it acts as a reminder of the consequences of failing to meet contractual obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.