A late fee is a fee imposed on a consumer, typically a borrower, by a creditor or lender. Fines result when a borrower makes payments after the scheduled payment date and/or outside the grace period. A late fee applies to borrowers who miss mortgage or credit card payments, medical bills, and items that were returned late.
Late fees also to apply to party’s that return a rental item such as a car or video after the due date. Late fee models vary and can either be charged on a daily, weekly, or monthly period and may be charged in the form of a percentage late fee.
Lenders and creditors impose late fees to deter clients and borrowers from making payments after the due date. Many lenders and creditors have grace periods on their scheduled payment date, however the ultimate purpose of a late fees is to incentivize borrowers to make payments on time. While a lender can charge severe late fees, they are not limitless in what they can charge. Courts assess what is permissible as a late fee by determining whether the fee is reasonable. This proves difficult in many instances and can often cause much divide between consumers and creditors.
Opponents of late fees state that such harsh penalties dramatically affect a borrower’s ability to repay debt and be financially solvent, particularly for the poor. The argument centers ion the fact that charging arduous late fees can cause borrowers to go further into debt if they miss a payment, thereby making it even more difficult to afford the payments in the future.
Late Fees May Add Up Overtime
Oftentimes, creditors and lenders charge fees on the original late fees. Subsequent nonpayment’s and failure to make payments on time will result in much higher fees. If the borrower does not pay back the full principal balance plus the late fee, the principal balance of the debt will increase. This might also result in a percentage rate being further charged onto the account.
Late Charges and Mortgage Payments
A borrower must pay a late charge in the event that he or she misses a mortgage payment. The standard late charge for residential real estate is 4%.
California Civil Code Section 1671 states that late charges cannot be punitive to coerce borrowers into timely payments. For example, lenders can only impose a late charge when a borrower is at least 10 days past due on a mortgage payment. Late charges also cannot exceed 10% of the principal loan amount and interest, unless that percentage equates to less than five dollars.
Late Fees Increase Debt Balance
Late fees if not paid within the grace period will increase the principal balance of the debt the borrower owes. Mortgage payments, rent schedules, and insurance bills if not paid within the allotted timeframe can subject the borrower to higher balances. The longer it takes for the borrower to come current, the greater the late fee the borrower will be subjected to. Typically, creditors add the late fee to the borrower’s balance. They may be subject to interest, penalties, and others.
When a borrower falls behind on a minimum payment and don’t pay the late fee on tome, the creditor will likely subject them to an interest fee. This could mean the lenders overall interest rate may increase on the borrower because the borrowers risk level increases, thereby granting the lender the right to increase the interest rate.
Late fees are a strategy by lenders to increase their revenue stream. While one of the main intents behind charging late fees is to deter borrowers from making payments past the payment due date, it does also help creditors make more money.
