Default Interest Clause

Default Interest Clause

A Default Interest Clause is a provision within a loan agreement or contract that specifies the interest rate that will apply if the borrower defaults on the loan. This clause is designed to protect the lender by allowing them to charge a higher interest rate once the borrower has failed to make timely payments or has otherwise breached the terms of the agreement.

The purpose of a Default Interest Clause is to deter borrowers from defaulting and to compensate lenders for the increased risk and potential losses associated with default. Typically, the default interest rate is set at a specified percentage above the regular interest rate, which may significantly increase the cost of borrowing for the defaulting party.

For example, if a loan agreement has a standard interest rate of 5% and includes a Default Interest Clause that states the interest rate will increase to 10% upon default, the borrower would incur additional financial penalties if they fail to meet their repayment obligations.

Importantly, the Default Interest Clause must be clearly outlined in the contract, detailing the conditions that trigger the default and the specific terms of the increased interest rate. This transparency helps ensure that borrowers are aware of the potential consequences of defaulting on their obligations.

In summary, the Default Interest Clause serves as a critical component of lending agreements, balancing the interests of lenders and borrowers by establishing clear repercussions for defaulting on a loan.