Substantive Legal Content

A Few Interesting (Sort of) Things About Interest

Here is a conversation that I had with lawyers from time to time. I would provide in a contract that interest would be payable at 18% if my client was not paid on time.

The other lawyer would tell me that 18% was an outrageous interest rate, that Prime was only 2.45% (or whatever) and that their client could borrow from the Bank at Prime + 1%.

I would agree. The 18% rate was outrageous.

Then I would ask the other lawyer if their client intended to pay on time. He would say yes. Then I would reply that they should have no problem with the 18% rate, which they would never have to pay. 

The other lawyer would then switch gears and say that sometimes shit happens and there could be a problem paying on time, and they did not want to pay 18% interest. My response would be that my client was not in the banking business. If there was a problem, we wanted them to borrow at reasonable rates from their Bank (or their mother, or a loan shark, or the mob) and pay us on time!

We were not stipulating for interest because we wanted to collect interest. We were providing for interest because we wanted them to have an incentive to pay us on time, and if things got tight not to use us as cheap financing.

A related point. Where or not you go with a rate as high as 18%, when amounts are owing to your client, you should always provide for interest to be payable at a rate significantly higher than what they can borrow at elsewhere. If they do run into financial difficulty, you do not want them to think that they should use their limited cash to pay someone else, because it is cheaper to come up with a spurious defense, hold you off with litigation and settle later, then it is to pay you right away. 

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