What is the default interest rate and where does it come from

Did you forget to pay the invoice by the due date, or did the invoice get lost in the mail? Whatever the reason for the delay in paying the invoice, a delayed payment reminder is sent out of the late invoices. But what is the default interest rate, and how is it calculated?

 

What is the default interest rate?

What is the default interest rate?

Default interest is a statutory compensation to which the invoicer is entitled if the invoice is not paid by the due date. The idea of ‚Äč‚Äčlate payment interest is to motivate the payment of invoices by the due date and of course to compensate the invoicer for the late payment.

Sometimes, you will pay the invoice before the reminder arrives, but after the due date of the original invoice. Even in such cases, the invoicer is entitled to charge default interest on days past due.

If no due date is specified on the invoice, interest for late payment may begin to run 30 days after the invoice is sent.

 

How is the default interest calculated?

interest calculated?

The basis for calculating the default interest varies according to whether it is a business-to-business or a consumer-to-consumer payment delay. In the case of a consumer customer, the default interest rate is determined as follows if the due date of the invoice has been agreed:

  • ‘In the event of late payment of the debt, the debtor shall bear interest for late payment at the rate of seven percentage points above the reference rate referred to in Article 12 in force at the time.’

Simply put, the above implies that the amount of the default interest is obtained by adding 7 percentage points to the Bank of Finland’s six-monthly reference rate. Until the end of 2017, the benchmark interest rate is 0.00%, representing a 7.0% interest rate. The interest rate level can be checked on the Bank of Finland website .

Enthusiastic mathematicians and skeptics of calculating skills can check the amount of late interest using the following formula:

  • (interest rate / 100 * sum * number of days) / 365

Thus, if the default interest is 7%, the overdue invoice is worth $ 150, and the payment is overdue by 30 days, then the formula will look like this:

  • (7/100 * 150 * 30) / 365 = $ 0.86

Even though the monthly accrued interest rate is not high, you should always try to pay your bills on time and never deliberately not pay your bills. If your invoice payment is only temporary, you may want to ask the invoicer whether the invoice due date can be postponed .

If your payment difficulties are of a more permanent quality, you should seek help in good time. It is a good idea to avoid default payments as it can make life difficult on many levels, from getting a home to getting a job. The payment default entry will be received no earlier than two months after the original due date.