Can Interest be Added to the Debt When Instructing a Debt Collection Agency?
So, now that you are familiar with how Debt Collection Agencies can add debt collection costs to the debt as described in our article 'Can Debt Collection Costs be Added to the Debt?', then you will also need to know if you can legally add late payment interest to your debt? And, how?
These are both great questions!
In this article, we'll break this down for you and by the time you're done reading this, not only will you have a clear sense of how the process works and how and when interest is applied, but you'll finally be on that path of getting your debt recovered – and be well informed! Let's dive in.
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The answer to this question is very similar to whether costs can be added to the debt as it depends on whether your debtor is B2B (Business to Business) or B2C (Business to Consumer) so we will answer these separately. If you’ve not already seen our article on costs then click on the link here.
B2B (Business to Business)
When your debtor is a business then interest can be added to the debt either contractually, e.g. by way of your signed contract or your terms of business (Terms and Conditions) or enforcing your rights by statute law in accordance with the Late Payment legislation, in particular the Late Payment of Commercial Debts (Interest) Act 1998.
If you haven’t got terms of business or a signed contract, you can rely on Late Payment legislation alternatively, you can rely on your terms of business should you have an appropriate clause. Either way, interest can be added to the debt in B2B matters.
The rate will vary depending on whether interest is being claimed in accordance with contractual or statutory rights. For instance, your contractual interest rate may be different to the statutory interest rate. If you have a contractual interest rate, then this rate must be applied therefore it makes sense for the contractual amount to be equal to or greater than your statutory right which is 8% per annum above the Bank of England’s base rate calculated on a daily basis.
Debt = £1,000.00
Interest = 8%
BOE base rate = 1%
Days invoice overdue = 50
To calculate Late Payment interest, you would use the following formula:
Debt x (Interest + BOE base rate) / 365 to get your daily interest rate then
x Days Invoice Overdue
£1,000 x 9% / 365 = 0.25 per day x 50 = £12.50
Your contractual interest rate can be anything you like, obviously within reason. If your interest rate is too high, it could be deemed as unreasonable and if the matter proceeds to legal action, then a court has the power to decide whether to allow, amend or reject interest therefore you do not want your interest rate to deviate too far from the statutory rate.
Prior to issuing legal proceedings in B2B matters, you must comply with the Pre-Action Protocol.
B2C (Business to Consumer)
Whilst you can add interest to the debt when a debt is B2B, the rules are slightly different when it comes to B2C. Simply put, interest cannot be added to the debt unless you have a specific clause in your contract or terms of business (Terms and Conditions). Interest can only be claimed once legal proceedings have commenced and this is usually claimed under section 69 of the County Courts Act 1984.
If you haven’t got a clause already then, we recommend you insert one as soon as possible especially if your client base in mainly consumers.
If you have got a clause in your contract or terms of business (Terms and Conditions) then you can legally add interest to the debt from the point the debt became overdue, and the rate of interest will be determined by your contractual clause. To calculate your interest then you can use the same formula as above but obviously changing the interest rate to reflect your contractual rate.
As above, your contractual interest rate can be anything you like, obviously within reason. If your interest rate is too high, it could be deemed as unreasonable and if the matter proceeds to legal action, then a court has the power to decide whether to allow, amend or reject interest therefore you do not want your interest rate to deviate too far from the statutory rate.
Above all, this doesn’t necessarily mean that a debtor will pay the interest, and it may be that you will need to issue legal proceedings to recover this. Depending on the value of the interest, it may not be cost effective to issue legal proceedings and therefore you will need to consider this before taking further action.
Prior to issuing legal proceedings in B2C matters, you must comply with the Pre-Action Protocol for Debt Claims.
Do We Still Have to Pay Debt Collections Costs if the Debtor Does Only Pays the Principal Sum? We will cover this in a separate article which you can find here.