Definition
Default Interest
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The default interest refers to the interest rate charged on the amount overdue on obligated payment amounts.
For example, if a home loan has a $1,000 monthly repayment, and the borrower fails to repay it or only pays a portion of it, the $1,000 or balance of it after deducting the partial payment will be subject to default interest charges.
It does not matter whether it’s the principal or the interest due.
The rate at which is charged to the borrower in default is called the default interest rate.
Different lenders might call this with a different name. But they all essentially refers to the same thing of interest charges on overdue payments.
Different can also have different terms surrounding the trigger of default interest charges.
For example, overdue default interest payable might even incur their own interest penalties. Creating an interest-on-interest compounding situation.
Some banks might even start billing these to borrowers for delinquencies instead of just defaults. Which is a reason why they name it differently.
Default interest often have very high charges such as the prime rate plus an annual rate of maybe 5%.
Failure to repay can lead to deferred interest and even negative amortization.
While banks can legitimately increase their revenue from such charges, it must be noted that defaults are the last thing that lenders desire as it affects their financial forecasts.
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