Tuesday, July 5, 2011

Charging Interest in the Absence of a Contract Term for Interest

The best practice for businesses supplying goods and services on credit is to include a contractual provision regarding interest. However, a creditor can charge interest if there is no contract provision regarding interest. Under Texas law, this is called legal interest. Legal interest does not begin to accrue until 30 days after the debt was originally due, and it accrues at a rate of six percent a year. The legal interest rate of six percent per year is simple interest. That is, the interest accrued each year is not compounded by adding it to the principal balance before computing the interest due in each subsequent year. This interest rate is actually “read into the agreement” and becomes the maximum rate that may be charged.

A lender must be careful not to charge in excess of six percent in the absence of a contract provision to do so. Charging a higher rate of interest may result in penalties for usury. Unilateral charging of interest by the lender, even with advance notice, is not enough to establish an agreement to pay interest at a rate greater than the legal rate of six percent.

If a lender charges more than twice the amount allowed by law, or 12 percent, he or she may be subject to penalties under Texas law. These penalties include forfeiture of the principal amount of the loan, reimbursement of any amounts paid by the debtor that was subject to the usurious interest rate, and three times the amount of usurious interest charged, even if the interest was never collected. The lender may also have to pay the debtor’s attorney fees.

Blog prepared by Chris Patterson.

Blog reviewed and posted by Sarah F. Berry.