To ensure timely payments from their customers, many companies have clauses in their agreements or invoices with terms of interest for late payments. It is not uncommon for invoices to state they must be paid within 30 days, after which the balance shall accrue at 1.5% interest per month.
There is no set limit in New York for how much interest may be charged, but the amount should be reasonable and not excessive. The interest rate described above has been ruled as acceptable by the courts in New York and is widely used. Beyond said interest provisions, businesses may seek additional remedies. For instance, if a customer defaults in payment but then agrees upon a subsequent arrangement to pay the outstanding balance, the business may want additional interest because of the defendant’s initial default. The business may insist on an agreement wherein the customer must pay the balance plus interest “compounded monthly” at a certain percentage until paid in full.
Rules for Charging Compound Interest
There are some things your business should consider before charging compound interest. Any agreement for additional interest must be in writing signed by the customer. New York also has a rule against compound interest. Compound interest is the calculation of interest on a certain sum based on both the principal and accumulated interest from previous periods. This makes a sum grow faster than under “simple interest,” which is calculated only on the principal amount. Under New York General Business Law, a party may not charge compound interest for any amount under $250,000.00. Any agreement for amounts due under $250,000.00 that contain compound interest is not enforceable. That is not to say the entire agreement that provides for compound interest would be rendered unenforceable, just the right to pursue compound interest.
Finally, the lender must consider the usury laws in New York. In New York, any loan or forbearance over 16% is considered civilly usurious and any such loan over 25%, criminally usurious. Consider a company that gives a loan for $200,000.00 with a 12% annual interest but requires a $20,000.00 penalty fee for defaulting on the first obligation. The $20,000.00 fee would be considered additional interest and the loan would be deemed to have an effective interest rate well above both the civil usury rate of 16% and the criminal usury rate of 25% described above. If the borrower defaults on the loan and is sued by the lender, the borrower could assert usury as a defense to the payment of the loan.
If you have a debt collection matter you need assistance with, contact Frank, Frank, Goldstein & Nager for a consultation. We have the experience that pays.