Interesting Decision

It's finally settled. Simply having an interest rate to be charged for late payments printed on your statements will probably get you nothing. You are still only entitled to the legal rate of interest, generally less than the prevailing market interest rate. The Colorado Court of Appeals recently ruled that a creditor cannot expect to receive more than the legal rate of interest fixed by Colorado statute unless he has a mutual agreement otherwise with his debtor. Surplus Electronics Corp. v. Gallin, 653 P.2d 752 (Colo. App. 1982). The practice of having higher rates of interest printed on statements (such as 1% per month, 1 1/2% per month and the like) has been widespread for many years. Some debtors have unwittingly paid the higher rate of interest, not knowing that the law does not allow such charges. However these payments may be construed as agreements established by conduct.

Creditors involved in the construction industry, such as suppliers, contractors and subcontractors, have one advantage in that they are statutorily entitled to interest at the rate of 12% per annum on mechanic's lien claims or higher if their agreements so provide. That still may not equal the cost of borrowing. More importantly, low rates of interest are not likely to induce prompt payment by a debtor whose borrowing interest rate is higher.

Accordingly, since the rate of interest is essential to cover either the cost of credit or to encourage prompt payment, businessmen should fix higher rates of interest by specific agreement with their potential debtors. Probably the best and most common method used in the construction industry is to provide for a specific higher rate of interest on unpaid accounts in either construction contracts, subcontracts or purchase orders. Many suppliers include interest rate provisions in their credit applications as well.

Remember: if you think you can charge more than the legal rate of interest simply by something printed on your statements-save the extra printing expense!