Late payment daily interest:
formula and worked example

Why late payment interest is worth calculating

When an invoice, an instalment or a bill goes unpaid past its due date, many contracts and lenders add interest for each day of delay. Sellers use it to recover the cost of waiting for money; lenders use it to discourage missed payments. For the person paying, the charge feels small day to day and then surprises them on the next statement.

Working it out yourself lets you check a statement, decide whether a late payment is worth the cost, or put a defensible figure on an overdue invoice you want to chase. The method is simple interest on the overdue sum for the number of days it stayed unpaid.

The formula: overdue amount, annual rate and days

Take the overdue amount, multiply by the annual rate as a decimal, then multiply by the days late and divide by the number of days in the year used for the contract.

• Overdue: the unpaid amount on which interest runs, in currency.
• Annual rate: the yearly percentage as a decimal, so 18% is 0.18.
• Days: the number of calendar days between the due date and the date of payment, applying any grace period your agreement allows.

Dividing by 365 is the most common convention, though some commercial and money-market contracts use 360. The contract or the lender's statement will say which applies.

If the agreement quotes a daily or monthly rate, convert it first. A rate of 0.05% per day is about 18.25% a year on a 365-day basis, and 1.5% per month is 18% a year. Working in a single consistent unit prevents the common error of mixing a monthly percentage with an annual formula and ending up with a number that is a dozen times too small or too large.

Worked example: 28,000 overdue for 12 days at 18%

1. 1Annual interest on the sum: 28,000 x 0.18 = 5,040.
2. 2Daily interest: 5,040 / 365 is about 13.81 per day.
3. 3Interest for the delay: 13.81 x 12 = 165.70, or 5,040 x 12 / 365 computed in one step.
4. 4Total due after the delay: 28,000 + 165.70 = 28,165.70.

Notice that the per-day cost is under 14 on a 28,000 balance. It is easy to dismiss a figure like that, which is exactly how small delays turn into regular charges.

Reading the result without overreacting to it

The calculation gives the interest component only. In practice a late payment can also attract a flat fee, and a lender may report the delay to a credit bureau, which has its own consequences that no formula here captures. Treat the number as the minimum financial cost of lateness, not the whole cost.

For a business chasing a customer, the figure is useful for a firm but fair reminder. For an individual, it shows how little each day costs compared with how much a long delay adds. Twelve days cost about 166; ninety days on the same sum would cost roughly 1,243, because the relationship is linear. The rate that applies to late payments is often higher than the ordinary borrowing rate, so use the penalty rate in your contract.

The linear behaviour has a practical consequence for negotiation. If you are the creditor, a sum of 28,000 left for a month costs the debtor about 414 at 18%, which is enough to prompt action but not so large that it sours the relationship. If you are the debtor, the saving from paying a few days sooner is small, so the better reason to pay promptly is usually avoiding the flat fees and the effect on your standing with the supplier or the credit bureau.

Where a contract applies tiered penalty rates, with a lower rate for the first weeks and a higher one afterwards, calculate each tier separately and add the results rather than applying the highest rate to the whole delay.

How interest scales with the overdue sum

A 10% larger overdue sum produces a 10% larger charge. The same proportionality holds for days: doubling the delay doubles the interest. That makes time the most controllable input; clearing a balance a week sooner is worth the same as reducing it by a corresponding fraction.

Errors that make late interest wrong

• Using a monthly rate with the annual formula, or vice versa. A quoted 1.5% per month is 18% a year, not 1.5%.
• Counting the due date and the payment date both, which adds a day the contract may not charge.
• Applying the penalty rate to the original principal rather than only the overdue instalment.
• Compounding the figure by habit when the agreement specifies simple interest for the delay.

Part payments need care as well. If you pay 10,000 on day 5 of a 12-day delay, interest on that 10,000 stops at day 5. Recalculate in two segments: the full amount for the first stretch, then the reduced balance for the remainder.

A routine for checking any overdue charge

Find the due date and the date the money actually reached the other party, since some contracts count from receipt rather than from the day you initiated payment. Confirm the rate and the year basis, and decide whether the grace period applies.

1. 1Count the chargeable days.
2. 2Multiply the overdue sum by the annual rate.
3. 3Scale by days over the year basis.
4. 4Compare your figure with the statement and ask for the working if they differ.