Common Errors in Calculating Late Payment Interest in Credit Contracts

COMMON ERRORS IN CALCULATING LATE PAYMENT INTEREST IN CREDIT CONTRACTS

In credit relationships, determining interest rates and late payment amounts is a complex issue that frequently leads to prolonged disputes. Applying incorrect formulas or failing to update current legal regulations not only causes financial loss but can also lead to contract terms being declared void by Courts or Arbitration.

1. Confusion Between "Overdue Interest" and "Late Payment Interest"

This is the most fundamental error, leading to the misapplication of ceiling interest rates set by the State Bank of Vietnam.

Overdue Interest: Calculated on the unpaid principal balance.

Late Payment Interest: Calculated on the interest amount that the borrower has failed to pay on time.

Legal Regulation: Late payment interest rates are generally capped at 10% per annum on the outstanding interest balance. Any portion exceeding this rate will not be legally protected during adjudication.

2. Incorrect Application of "Interest on Interest" (Anatocism)

Adding interest to the principal to continue calculating further interest (compounding interest) is a sensitive practice that can be deemed illegal without proper grounds.

Conditions for Application: This is only accepted in very limited circumstances and must be explicitly agreed upon in writing.

Legal Basis: Such agreements must comply with Circular 39/2016/TT-NHNN. Arbitrary application often leads to litigation for illegal interest calculation.

3. Failure to Update Reference Interest Rate Fluctuations

For contracts with floating interest rates, failing to update adjustment margins promptly leads to discrepancies between the requested payment and the actual debt balance. This often occurs when the lender fails to notify the borrower in time or miscalculates the adjustment period.