# How to determine interest on overdue payment, based on terms of the contract

1

So, like most of the people starting out with own business, I picked a boiler plate contract and made minor modifications and used for a client project.
You might already be familiar with this contract (used over and over on the internet):
http://www.scribd.com/doc/13341916/WEBDEVT-Team-SPARKs-Website-Proposal-ver-12 (This is not our contract, but is a modification of the same template).

But now, the client is overdue on payment and I would like to use the terms of the contract to speed up payment. Terms are (see section 12 of the above).

Final payment of the remaining balance
plus any additional charges incurred
will be due within fourteen (14)
business days after delivery of this
email or letter and invoice. If
payment is not made within fourteen
(14) days of notification, simple
interest will accrue on the balance
owed at a rate of 18% from the date
the payment was due.
Now, I'm not clear whether the interest is calculated daily or monthly or etc. Say for a payment of \$7000 what's the interest for 30 days overdue?

• Hopefully you have exhausted other means first and are just using this as a gentle reminder. You can ask for 18% interest. You might even be paid 18% interest. But whether the client will ever use you again if you pursue interest too aggressively and payment is only 30 days overdue is another matter. – Mike 13 years ago
• Yup, understand. Actually, we were only going to make a reminder and to encourage speedy settlement of the account. We have some assets that we need to transfer to the client and want to be done with it and move on to other work. Just wanted to know what kind of a "motivation" the statement is going to provide. Didn't want the client see the clause and think "pfft.. I can sit on this for longer. This is peanuts" :) – User4568 13 years ago

1

Ok, hwere we go. This is simple math.

• A year has 360 days, a month 30. Yes, this is how banks calculate, sorry.
• 18% is 1.5% per month.

So, 30 day interest is 1.5% of the orignial sum.

Interest is calcualted daily if needed (period below one month). Max. 30 days a month.

So, 7000 USD; 30 days is 105 USD.

For a lot ofd defauils how that is properly calculated check Wikipedia:

http://en.wikipedia.org/wiki/Day_count_convention Sadly bankers came up with their own way to do things.

• Thanks, I was hoping the interest was per month :) Feels like they owe me more money than 105. Too bad :) – User4568 13 years ago

0

Here's how I would do it:

Your contract says you charge Simple Interest which means that you don't earn "interest on interest" i.e. your interest payments stay constant, at a fixed percentage of the original principal.

``````I = P * r * t
``` ```
Where

``````P = Principal = \$7,000
r = Interest rate (18% or 0.04931507% per day)
t = Number of days past due (30 in your example)
``` ```
Therefore,

``````Interest for 30 days = \$7,000 * 30 * 0.0004931507 = \$103.56
``` ```