Legal Definitions - Boston interest

Boston interest refers to a specific method of calculating interest on a debt or principal amount. Under this method, any interest that accrues but remains unpaid at a predetermined interval (such as annually) is added to the original principal. Subsequent interest calculations are then performed on this new, larger principal amount, effectively compounding the interest. This approach ensures that interest is earned not only on the initial principal but also on any accumulated, unpaid interest from previous periods.

Here are some examples to illustrate how Boston interest might apply:

• Commercial Loan Agreement: Imagine a small business takes out a loan from a private lender. The loan agreement specifies that if the business misses any scheduled interest payments, the unpaid interest will be added to the principal balance at the end of each year. Future interest will then be calculated on this increased principal using the Boston interest method. If the business fails to pay $5,000 in interest in the first year, that $5,000 is capitalized, meaning it's added to the original principal. In the second year, the interest rate will be applied to the original principal *plus* that $5,000, demonstrating how the unpaid interest itself begins to earn interest.

• Court Judgment for Damages: A court issues a judgment awarding a plaintiff $200,000 in damages. The judgment specifies that if the defendant does not pay the full amount immediately, post-judgment interest will accrue at a certain rate, calculated using the Boston interest method, until the entire sum is settled. If the defendant delays payment for a year, the interest accrued during that year is added to the $200,000 principal. For any subsequent period of non-payment, the interest will be calculated on the original $200,000 *plus* the previously accrued and unpaid interest, ensuring the plaintiff is compensated for the full outstanding amount, including the interest that has already accumulated.

• Long-Term Installment Contract: Consider a contract for the purchase of a large piece of equipment, where the buyer agrees to pay in annual installments over several years. The contract includes a clause stating that any overdue installment payments will incur interest calculated using the Boston interest method, with interest compounding annually on the overdue amount. If the buyer misses an installment payment, interest immediately begins to accrue on that overdue amount. If that accrued interest itself remains unpaid by the end of the year, it is added to the outstanding balance of the overdue installment. In the following year, interest is then calculated on this new, higher outstanding balance, reflecting the compounding effect of Boston interest on the delinquent debt.