There is a common misunderstanding with respect to a late fee and interest.

Often a contract will provide for a late fee as a contract term for breach of the repayment obligation. Regrettably, the language used too often to express such a fee is ambiguous—that is not stating that it is a contractual late charge. For example, the language may be stated as “1.5% per month for default in payment.”

There is a real difference though between a “late fee” and “interest.”

A “late fee” is a contractual obligation for breach of the agreed repayment term. For example, if a contract gives a grace period of 10 days and provides for a late fee if payment is not made within such time period, that is a contractual agreement in the nature of liquidated damages for failure to meet the contractual obligation of timely repayment.

“Interest” is the agreed charge for the contractual right of a party to defer payment for a period of time and incur a charge for exercising that right.

Is this a distinction without a difference? Well, depending upon the state law relating to “late fee” and “interest,” this distinction can be meaningful.

Practice Pointer: If your consumer transaction documents are not clear on this point, you may want to go back to the drawing board.

Please Note: This is the two hundred fifth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking Dentons - Consumer Finance Report.