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What happens if a borrower pays late?

Many people ask us about payment information, particularly “What happens if a borrower pays late?” We would like to use this opportunity to remind everyone about the importance of making on-time payments and the consequences of not doing so.

For some reason, the first payments are always awkward. It is your responsibility as a borrower to make your payments on time. We advise all the borrowers to print off the term sheet and highlight the payment date and account information. There is absolutely nothing wrong with paying a couple of days in advance or even a week! Scrambling around on the payment date puts everyone on edge.

Many borrowers prefer to set up an automatic payment with their bank. Remember, the goal is to establish a great relationship between the borrowers and lenders. The first step is to pay on time or even a day or two earlier! The comfort level increases monthly with every payment made on time and is worth its weight in Gold. Once this loan is paid off, there may come a time when a new loan is needed, and with that excellent track record, it is easy for us to say, “Never a day late or a dollar short!”. This is worth more than the collateral itself!

But what happens if the borrower doesn’t pay on time? In this case, the debtor is subjected to specific penalties. In Costa Rica, the legal process for compensating the lender when a debtor fails to pay a loan payment on time is known as “interés moratorio,” which translates to “interest on arrears,” “default interest,” “late interest,” or “moratorium interest.”

When a debtor defaults, the lender might demand full payment and start a foreclosure case, in addition to imposing the late interest. Late interest and current interest will be applied until the lender is paid in full (they are charged separately).

 

The Code of Commerce states the following:

 

Article 498. – Late interest shall be equal to current interest unless otherwise agreed.

When current and late interests are agreed upon, the latter cannot be higher than thirty percent (30%) of the rate agreed for current interest.

 

This is a mandatory rule that the parties cannot waive. If the late interest exceeds the 30% guideline, the Registry, for example, will refuse to register the mortgage. So, if the parties agree on a current interest rate of 12%, the maximum late interest is 15.60 % (12+3.6).

Late interest is calculated differently from the current interest: it is calculated on the amount that the borrower had to pay on a given date. They are calculated on the quota that he had to pay. They are not calculated on the debt’s balance at that date.  Many people get confused with this point because they consider that when there is a delay, what happens is that the late interest replaces the current interest until the debt is updated. This is not the case; both interests are calculated independently: current interest on the loan amount; late interest on the payment amount.

 

For example, Boris borrows $100,000 USD from Natasha with a current interest rate of 12% per year (1% per month), resulting in a monthly payment of $1000 USD. The payment due date is the 01 of each month.

  • On January 01, 2022, Boris had a $1,000 USD monthly payment due to Natasha. This payment is a current 12% interest payment, and the late interest rate is 30% higher than the 12% interest rate, which is 15.6%. Boris did not show up to pay Natasha.
  • Now it’s January 15, 2022, and Boris is 15 days late to pay Natasha.
  • On January 15, he presented to pay the $1,000 USD to Natasha.
  • Natasha makes the calculations and says: “Boris! You must pay me $1,150 USD.”  You had to pay me $1,000 USD on January 01. It has been 15 days since then. The late interest rate we established is 15.6%. So, your loan of $100,000 USD is now a 15.6% interest rate until you make your late payment. That being said, $100,000 multiplied by 15.6% gives me $15,600 (for the year), which is divided by 12 months = $1,300 you now owe me if you would have been late for the entire month. So the difference between $1000 (which would have been owed if you paid on time) and $1,300 (what you owe me now as you are late) is $300. This means that you owe me $300 extra for the entire month in late fees. But you are late only 15 days, not 1 month. So, we divide $300 by 30 days of the month of January*, which gives us $10 (late fees per day in January). As you are 15 days late, we multiply $10 times 15 days late = $150 USD. So now, Boris, you owe me $1000 (your normal monthly payment) + $150 (late fees for 15 days) = $1,150 USD.
  • Natasha recovers her money and reminds Boris that the next payment will be on February 01, in 16 days.

* A commercial year consists of 12 months of 30 days each (the reason the numbers of the days in the months are adjusted in such a way is to make comparisons for sales and expenses easier). This 360-day year calculation is commonly used in some accounting systems, including Costa Rica.

Calculation:

Normal scenario:

100,000 x 12% = $12,000 (per year)
12,000 / 12 months = $1,000 (normal payment per month)

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 “If you are late” scenario:

30% x 12% = 3.6% (your late fee % added to your normal 12%)
12% + 3.6% = 15.6% (your late fee % on your loan now)
100,000 x 15.6% = $15,600 (your annual payment if you are late 1 year)
15,600 / 12 = $1,300 (your monthly payment if you are 1 month late)
$300 / 30 = $10 (your daily payment if you are late). 
$10 x 15 = $150 (your late payment for 15 days)

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Think of it this way – it’s as if you’re borrowing $100,000 USD from the lender at 15.6%, (while you are late) if you don’t make the $1000 USD payment on time.

Note:

Not all loans have an annual interest rate of 12%. Here’s a sample chart with other interest rates and late fees:

10% interest rate = 13% late interest
12% interest rate = 15.6% late interest
14% interest rate = 18.2% late interest
16% interest rate = 20.8% late interest
18% interest rate = 23.4% late interest

Apart from late interests, lenders will often charge an “administrative fee”, to cover all the extra necessary paperwork:

  • up to $100,000 USD – $25 USD
  • $100,000 USD to $500,000 USD – $50 USD
  • >$500,000 USD – $100 USD

 

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