default interest provision


default interest provision
A provision in a contract which:
• Provides a contractual sanction against non-payment of a sum of money; and
• Is a form of liquidated damages for that non-payment.
A default interest provision is nearly always included in an agreement where interest would be payable in the ordinary course of dealings as a part of the transaction, most obviously in a loan agreement. The rate of default interest payable in such a case is usually 1% or 2% above the rate payable in the ordinary course of the agreement where all the sums are paid on time. In other types of transactions, a default interest clause may be included to support an obligation to pay a sum of money by a particular date. Care needs to be taken in the choice of default rate and the manner in which it becomes payable to guard against it being invalid as a penalty. The rate should reflect the estimated loss to the supplier of being deprived of the use of the funds.
Related links

Practical Law Dictionary. Glossary of UK, US and international legal terms. . 2010.