Seven Principles of Interest

Posted by William J. Piercy on

Businesses rightfully expect to be paid for the products, services and value they provide. Unfortunately, some customers are more interested in receiving that value than in paying for it. To these customers, an invoice isn’t even due until it is hand delivered by the sheriff along with a summons and complaint.

When it becomes necessary to file a lawsuit to collect a receivable, the law allows for the recovery of more than just the outstanding principal balance. A recent post discussed the recovery of attorney’s fees. This post addresses when and how much accrued interest can be recovered in court. While there are exceptions and complexities, the law of interest in Georgia can be summed up in seven general principles.

Principle One – Pick Your Rate. A debtor and creditor may agree to any interest rate, and so long as it is not usurious, that agreement will be enforced.

Principle Two – Usury. An interest rate in excess of 60%(!) per year constitutes usury. A creditor attempting to collect on a usurious loan forfeits the right to any interest, in addition to the possibility of criminal charges. Courts are free to re-characterize late fees, processing fees, commissions and other expenses as being interest for purpose of determining whether a loan is usurious.

Principle Three – Due on Demand. If no repayment terms or due date are agreed upon at the inception of the obligation, a debt becomes due immediately when the creditor demands repayment. Interest begins to accrue at the time of this demand and not when the value (whether products, services, or money) was provided.

Principle Four – Application of Payments. Payments toward an outstanding debt are applied first to accrued interest, then to pay down principal. Generally, a creditor is not entitled to compound, or interest on interest, even if an interest payment is in arrears.

Principle Five – Pre-Judgment Imputed Rate. Where the parties did not agree on a specific rate of interest when the obligation was incurred, in most instances courts will impute a 7% simple interest rate on most debts, at least until entry of judgment.

Principle Six – Commercial Accounts. A commercial account is a financial obligation arising out of business-to-business, non-consumer transactions. In some instances, a commercial account vendor may recover interest of 18% per year on that portion of a revolving credit account that has been due for more than 30 days, even if the parties did not agree to a specific rate of interest.

Principle Seven – Post-Judgment Imputed Rate. Once a creditor wins in court and secures a judgment, the applicable interest rate is either that agreed to by the parties in the underlying contract (see Principle One), or the prime rate plus 3%. At the time of this publication, the prime rate is 3.5%, making the imputed post-judgment interest rate 6.5%. In one of many oddities of the law of interest in Georgia, the imputed pre-judgment interest rate of 7% (see Principle Five) is half a percent higher than the imputed post-judgment interest rate.