Search

How can we help?

Icon

Default interest rates: How much is too much?

It is commonplace for lenders to charge interest on late payments. This deters borrowers from delaying repayments and offers creditors increased incentive to lend to or deal with borrowers who represent higher risk of default. Sometimes, a lender’s terms and conditions will provide for an increased rate of interest to apply following a default.

Debtors are afforded some protection against excessive increases in interest rates on default. If the increase is so significant that it can be considered a penalty, that increase can be unenforceable. Importantly, the responsibility is on the debtor alleging that an increase is a penalty to demonstrate that it goes beyond what is acceptable.

What constitutes a fair increase in the interest rate following a default can prove contentious, particularly as numerous businesses have seen their revenues decrease dramatically due to the pandemic. This makes repayments harder to meet and so more businesses may be facing increased interest rates due to default over the next few months.

A recent case, Ahuja Investments Ltd v Victorygame Ltd and another has built upon existing caselaw to provide additional guidance into what can be considered an excessive increase. Following a default by the debtor, the lender increased the interest rate from 3% per month to 12% compounded monthly.

The increase was found to be so significant that it was not even necessary for the debtor to provide evidence of market rates for such an increase to demonstrate that it was a penalty.

Although this case was about the rate of interest payable under a loan agreement, the guidance provided also has wider application to other contracts which may contain penalty clauses, such as those sometimes found in supplier terms and conditions.

What constitutes a fair increase in the interest rate following a default can prove contentious, particularly as numerous businesses have seen their revenues decrease dramatically due to the pandemic.

Many could find themselves facing increased interest rates after struggling to meet their debts during the pandemic. Our dispute resolution solicitors can assist both creditors and debtors who face a dispute about default interest rates or other forms of penalty.

Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

Author profile

About this article

Read, listen and watch our latest insights

Pub
  • 09 July 2026
  • Litigation and dispute resolution

The Arbitration Act 2025 – Factsheet

This factsheet outlines the major reforms and key developments introduced by the Arbitration Act 2025, including updates on summary disposal, jurisdictional challenges, emergency arbitrators, arbitrator disclosure duties, and governing law in arbitration proceedings.

art
  • 09 July 2026
  • Immigration

Right to Work Checks are changing from 1 October 2026: Is your business ready?

The Home Office’s new rules, effective 1 October 2026, will overhaul right to work checks and raise the risk of civil penalties for UK businesses.

art
  • 08 July 2026
  • Privacy and Data Protection

ICO prosecutes employee under the Data Protection Act for forwarding client data to his personal email address

The issue of employees taking confidential business information or personal data when moving to a new employer remains a significant concern for businesses.

Pub
  • 07 July 2026
  • Litigation and dispute resolution

Accelerating arbitration: Expedited procedures and key changes in the new ICC Rules – Episode 2

In episode 2, Jack Hobbs (Clarkslegal) and Christopher Howitt (Three Stone) explore how the latest expedited and highly expedited procedures under the ICC Arbitration Rules 2026 are transforming the landscape of dispute resolution.

art
  • 07 July 2026
  • Employment

6 month unfair dismissal rights: What employers need to know

Under the new Employment Rights Act 2025 the minimum period of service required to qualify to bring a statutory claim for unfair dismissal has been reduced from 2 full years to 6 months from 1 January 2027 onwards.  

art
  • 02 July 2026
  • Litigation and dispute resolution

Litigation and Artificial Intelligence: Where are we now?

In the recent case of Cork and another v Smith, the High Court publicly admonished a law firm and two of its solicitors after they had produced and submitted two AI-generated letters to the court containing misleading and false information in relation to a block transfer application made under Rule 12.37 of the Insolvency (England and Wales) Rules 2016.