Definition
Default interest is an additional charge a lender may apply to overdue amounts, or sometimes to the whole balance, while a loan is in default. It is set out in the loan contract and usually applies on top of the normal cost of the loan until the default is fixed. It can make a missed repayment much more expensive, so check the clause before signing.
Default interest rarely gets attention when a loan is signed. It becomes very important if a repayment is ever missed.
How it works
The contract sets out when default interest applies and how it is calculated. It is usually charged on top of the normal cost of the loan and continues until the default is remedied. Dishonour fees and enforcement costs may apply as well.
Why it matters
A short delay can become expensive, particularly if default interest applies to the whole balance rather than just the missed amount. That cost can make it harder to catch up.
What to do
Read the default clause before signing, understand what triggers it and contact the lender before a repayment fails if you see trouble coming. Our guide to reading a loan contract explains the related clauses. To review options, make one enquiry.
Common questions
When does default interest start?
It depends on the contract. It may start from the date of a missed payment or after a notice period. Read the default clause.
Does default interest apply to the whole loan?
Some contracts apply it only to overdue amounts; others apply it to the whole balance once a default is declared.
Sources and further reading
Related terms