Late fee

Usually expressed as a percentage of the overdue instalment or a flat dollar amount, whichever is greater, and applied once a stated grace period expires. On a monthly-pay term loan it is a modest, occasional annoyance.

On a daily or weekly remittance product it is a different animal, because the events that generate fees happen twenty-odd times a month.

The fee family

Four separate charges get conflated:

• Late fee: the payment was late
• Returned payment or NSF fee: the debit was attempted and failed. Charged per attempt, and where an agreement permits re-presentment, a single insufficient day can generate multiple fees. Your bank will also charge you separately for the same event
• Default interest: an uplift to the rate on default, sometimes applied retroactively
• Collection and attorney's fees: passed through under the costs clause

Where the money goes

Most commercial agreements provide that fees are added to the outstanding balance rather than billed separately, and that payments are applied to fees and costs before principal. The combined effect is that a run of failed debits increases the balance while every subsequent payment is consumed by charges before it touches what you actually owe.

Limits

Commercial late fees are largely a matter of contract. Some states regulate late charges in specific consumer contexts and a few address commercial charges; a fee grossly disproportionate to the loss can in principle be attacked as an unenforceable penalty, but that argument is difficult in a commercial contract between businesses.