Glossary
Default interest
Also called: default rate, penalty interest
Default interest is a higher interest rate that applies when a borrower is in default, such as after a missed payment or when a loan is not repaid at maturity. It is usually set out in the loan agreement as a margin above the standard rate.
An example
A short-term loan reaches its expiry date before the borrower's property has sold. The loan agreement allows the lender to charge default interest on the full balance from the expiry date until it is repaid.
Why it matters
Default interest can increase the cost of a loan quickly, especially on short-term loans where exit delays are common. Borrowers should know the default rate, what triggers it and whether an extension can be agreed in advance.
Points to check
Look for the default rate in the loan agreement and note exactly what triggers it, such as a missed payment, a late extension or a breach of a covenant. Check whether it applies to the whole balance or only the overdue amount, and whether it starts immediately or after a notice. For regulated loans, consumer credit law limits some default charges. If you think you may miss a payment, talk to the lender before it happens.