2 min read
Definition
Penalty interest is an elevated rate applied when a borrower breaks the agreement. Under English law a clause that is a genuine pre-estimate of the lender’s loss is enforceable; one that is extravagant and punitive may be an unenforceable penalty. In practice it overlaps with default interest.
In plain terms
There is a line between compensating a lender and punishing a borrower — the law only enforces the former.
Why it matters for your company
Check any penalty clause is a fair loss estimate, and always talk to the lender before triggering it. See default interest.
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