How To Calculate Interest On Late Payment? Learn How In This Post

Do you want to know how to calculate late payment interest ? It is very useful to know how to do it, since you can save yourself imbalances or lack of liquidity in the company’s treasury. Keep reading and we will explain how to calculate it easily.

What is interest for late payment?

Also known as default interest , it is the compensation that a person must pay for the delay of a debt.

It is important to note that late payment interest does not apply in the same way for all types of contracts: it depends on the conditions of the European Central Bank and the Ministry of the Economy .

In summary, two types of delay can be classified :

  • By contract between individuals , where the delay begins when the creditor claims judicially or extrajudicially from the creditor to comply with the provisions of the contract.
  • By commercial contract , where the delay begins in the time established to pay or pay the debt in full.

To understand late payment interest it is necessary to understand some key concepts :

  • Legal interest of money
  • Percentage of delay

Legal interest of money

It refers to the percentage that is legally fixed and that makes it possible to calculate the compensation. That is to say, it is a charge for not paying in a timely manner . It is important to know that the Civil Code of Spain is the entity in charge of regulating this interest.

Percentage of delay

It is the proportion that is calculated taking into account the days that have elapsed since the maturity of the debt .

How to calculate it?

This interest rate is based on a percentage of the total debt. To calculate it, the following formula must be applied:

Interest on late payment = (Amount owed) x (time delayed / 365) x (interest rate on late payment) 

Let’s take a practical example of a commercial operation: imagine that a client owes a company 3,000 euros as of August 23, 2020. Payment, as agreed, must be made before September 15, 2020. Instead, the client He does it 30 days later. Applying the formula, and taking into account that a 5% default interest was agreed, it would be as follows:

Interest on late payment = (3,000 euros) x (30/365) x (0.05) = 12 euros

At what point to claim default interest?

To claim this interest, the type of default contract that we mentioned above must be taken into account , but also consider these conditions:

  • That the debt has reached the agreed date and the debtor has not made it.
  • That the debt is in a monetary way.
  • That the non-compliance conditions have been stipulated in the contract.

A good advice to avoid this situation is to keep up with the payments or request some type of extension , in order not to let the terms expire and fall into this interest rate. Although at any time, there is always a solution or alternative to stabilize your financial life .

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