Share the post “Delinquency interest: what it is, when it applies and how it is calculated”
By not paying your debts to the State, the electricity bill or the installment of a bank credit, for example, you are in default and, therefore, you will have to pay default interest.
In the event of late payments with financial entities, in addition to the payment of default interest, the default will be recorded on your Banco de Portugal Responsibility Map and consequently on your credit history, which may make it difficult to obtain new loans, or at least, have a negative impact on the interest rate that may be charged on new loans.
Although interest on arrears is always calculated in the same way, the rates to be applied differ depending on the entity to which the payment is late.
What is default interest?
Interest on arrears, or interest on arrears, are no more than the amount you will have to pay in excess for late payment of any amount due to the State, companies or even banks.
That is, if you do not meet the deadlines you have to make a certain payment, it is “delayed”, that is, it is in arrears. From the date on which you should have made the payment, until the date on which you will make it, you will therefore have to pay a penalty. This penalty is called late payment interest.
Default interest is thus a form of compensation to the entity for late payment of its debt.
How is default interest calculated?
In order to calculate default interest you need to know:
- The outstanding amount;
- The late fee to be applied;
- The number of default days.
Then just apply the following formula:
- Arrears interest amount = Amount owed x arrears interest rate / 365 x number of days in arrears
Note that, in debts to financial entities, the number of days to be considered is 360 and not 365.
What is the default interest rate to apply?
The default interest rate to be applied depends on the nature of the entities to which you will have to make the payment.
We can classify entities into three groups, each with different default rates:
- State and public entities;
- commercial entities;
- Financial Institution.
Debts to the State and public entities
The Treasury and Public Debt Management Agency publishes, by December 31 of each year, the annual interest rate for arrears that will be in force in the following year, applicable to late payment of debts to the public sector.
Fur Notice 177/2023, the default interest rate for the year 2023 applicable to debts to public entities is 5.997%a significant increase compared to 2022 (in which the rate was 4.510%).
Example
Let’s assume that you didn’t pay the IUC for your car worth €36.96 on the date you were supposed to. Therefore, 90 days later, he received a letter from the AT for the payment of the IUC plus default interest, totaling €37.51.
The calculations made were as follows:
- Total payable = amount owed + default interest
- Default interest = €36.96 x 4.510%/365 x 90 = €0.55
- Total payable = €36.96 + €0.55 = €37.51
Thus, 90 days later you will have to pay €0.55 of interest on late payment which is added to the IUC amount.
commercial debts
Late interest applies to all business transactionsin relation to credits owned by commercial companies, natural or collective, in which the agreed payment deadlines were not met.
That is, if you do not pay your electricity, water or other service contracted with a company, an interest rate will apply for commercial debts.
In this case, the fee is not annual, but semi-annual, and is disclosed by General Directorate of Treasury and Finance at the beginning of each semester.
In a simplified way we can say that the rate is:
- 9.5% for contracts concluded before 1 July 2013;
- 10.5% for contracts entered into after 1 July 2013 – also applies to contracts with companies covered by the Decree-Law No. 62/2013.
These rates have remained unchanged since the second half of 2016.
Example
He has a contract with the water supply company since 2015, but missed the deadline for paying the water bill worth 50 euros. Therefore, the following month, the invoice was again presented for payment, with interest already added:
- Default interest amount: 50 x 10.5%/365 x 30 = €0.43
Thus, you will have to pay €50.43 for the situation to be regularized.
Debts to financial entities
This fee applies to all contractual breaches before financial entitiessuch as the payment of mortgage payments.
When applying for a credit, you will pay the bank interest on the amount owed. This interest is the financial entity’s remuneration for the amount you lent it. We can thus say that the Nominal Annual Rate (TAN) is a remuneration rate.
If you fail to pay the loan installment, the financial entity will charge default interest corresponding to the application of an annual surcharge that is added to the TAN, on the amount of your installment.
This surcharge is limited by law, since 2013 its maximum value is 3%.
Default interest is calculated on a daily basis on the amount of installment due and unpaid, for the duration of the default.
Example
He has a home loan with a TAN of 2% of which he has not paid the monthly installment of €500.
If you intend to pay the installment 22 days later, you must pay the amount of the monthly installment plus default interest for the period in which you were in default.
So you will have to pay:
- Total payable = monthly installment + 22-day interest on arrears
- Default interest = 500 x (TAN + late payment surcharge)/360 x 22 = 500×5%/360×22 = €1.53
- Total payable = 500 + €1.53 = €501.53
Any payment that you have not made by the due date will incur late payment interest.
Try to avoid defaults. If they result from changes in your financial situation, talk to the entity you owe.
They will certainly find a solution to the situation, from payments to installments (when it comes to debts to the State and service companies), consolidation or restructuring of credit in debts to banks.
Article originally published in July 2019. Last updated in January 2023.
