Late Fees and Returned Payments: The Charges Outside the APR

Two different charges for two different problems

One bounced payment can trigger both: the returned-payment fee right away and a late fee if the installment is still unpaid after the grace period. On a simple-interest loan, interest also keeps building on the balance until the payment arrives.

Where to find them on your loan papers

Regulation Z section 1026.18(l) requires the Truth in Lending disclosure to state any dollar or percentage charge that may be imposed before maturity because of a late payment. Look for a line headed "Late charge" or "Late payment" near the payment schedule. It should give the amount or the percentage and, usually, the number of days after the due date when it applies.

The returned-payment fee is not on the federal disclosure list, so it usually appears only in the loan agreement, often in a section on fees or payments. Read both documents before you sign.

• The amount: a flat dollar figure, a percentage of the installment, or the greater of the two.
• The trigger: how many days after the due date the fee applies, and whether a partial payment counts as late.
• How often: once per missed installment, or again each month the installment stays unpaid.
• The returned-payment charge: its amount, and whether the lender will retry the draft, which could bounce a second time.

What states allow, with two examples

For a lender licensed by your state, the size of these fees and when they may be charged come mainly from state lending law, and the limits differ from state to state. Two examples from the statutes:

On the $341.78 monthly payment of a $10,000, 36-month loan at 14%, the Ohio limit works out to $17.09, because 5% of the installment is more than $15; the Florida limit is $15. A payment that bounces and stays unpaid past the grace period could cost up to $37.09 in Ohio, plus any bank pass-through cost. These are worked examples of the maximums, not the fees any lender charges. See the full pages for Ohio and Florida, or find your state's rules.

Federal rules that limit penalty fees

• No pyramiding. The FTC Credit Practices Rule, 16 CFR 444.4, makes it an unfair practice to charge a late fee on a payment that is in full and on time, or within the grace period, when the only shortfall is an unpaid late fee from an earlier installment.
• No forced autopay. Regulation E bars a lender from making automatic payments from your account a condition of the loan, so you can choose a payment method that you control. See autopay and rate discounts.
• Servicemembers and dependents. The Military Lending Act caps the military annual percentage rate at 36%, and that rate counts credit insurance and add-on product fees even where Regulation Z leaves them out. It also bars a creditor from using a check or other access to your deposit account as security, apart from limited exceptions in 32 CFR 232.8. Read loans for military borrowers.

If you think a fee breaks your state's limit or your agreement, ask the lender in writing to reverse it, then complain to your state's lending regulator or the Consumer Financial Protection Bureau.

How to avoid the fees

1. 1 Find the grace period in the agreement and note the last day a payment counts as on time.
2. 2 Line the due date up with payday. Ask the lender whether it can move the due date; the first payment and autopay guide covers when to ask.
3. 3 Keep a cushion in the account an automatic payment draws from, and turn on low-balance alerts.
4. 4 Call before you miss. If a payment will be short, call the lender ahead of the due date to ask about a deferral or a payment plan, and get any agreement in writing.

You can ask the lender to waive a first late fee; whether it does is up to the lender. A payment reported late to the credit bureaus can weigh on your credit for years, so bring the account current as soon as you can. Our sister site Funditia explains how payment history affects credit scores.

Questions people ask