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Default rate
Also called default interest, penalty rate.
The pricing a contract applies after a default: an elevated interest rate on a loan, or on a purchase agreement, a stated default fee plus immediate acceleration of everything uncollected.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
On an interest-bearing facility, default interest is a margin added to the note rate for as long as the default continues. It is written as a per annum figure and applies to the outstanding balance. Some documents apply it automatically on default, others only after notice, and some only after acceleration.
On a purchase of future receivables there is no rate to raise. Those documents substitute a fixed default fee, sometimes a percentage of the purchased amount, alongside NSF charges per returned debit, collection costs, and attorney fees stated as a percentage rather than as actual cost.
Whether a charge of this kind is enforceable is a state-law question. Courts distinguish liquidated damages, which estimate hard-to-measure loss and are generally enforceable, from penalties, which are not. Outcomes differ by jurisdiction and by how the clause is drafted.
Where this one catches people
In an advance, defaulting does not raise a rate, because there is no rate. It makes the entire uncollected purchased amount due immediately, fee included. A merchant three weeks into a schedule who bounces a debit can owe substantially the full stated total the following day, plus default and collection charges layered on top.
Where you will meet this term
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Default rate — common questions
What does default rate mean?
The pricing a contract applies after a default: an elevated interest rate on a loan, or on a purchase agreement, a stated default fee plus immediate acceleration of everything uncollected.
Where does default rate catch people out?
In an advance, defaulting does not raise a rate, because there is no rate. It makes the entire uncollected purchased amount due immediately, fee included. A merchant three weeks into a schedule who bounces a debit can owe substantially the full stated total the following day, plus default and collection charges layered on top.
Is default rate the same as an interest rate?
Default rate is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does default rate apply to?
Merchant Cash Advance, Term Loan, Business Line of Credit, Equipment Financing.
Is there a worked example of default rate?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside default rate?
Acceleration clause, Attorneys' fees clause, Default, Event of default, Liquidated Damages.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.