Legal Definitions - contract rate

The contract rate refers to the specific interest rate that two or more parties formally agree upon and document within a legally binding agreement or contract. This rate is explicitly stated in the terms of the agreement and governs the calculation of interest for borrowed money, credit, or overdue payments.

Unlike statutory interest rates, which are set by law and apply when no rate is specified, the contract rate is a result of mutual consent between the parties involved. It is the rate that the borrower and lender, or the service provider and client, have negotiated and committed to uphold throughout the duration of the contract.

Here are some examples illustrating the contract rate:

• Mortgage Loan Agreement:

  A couple purchases a home and secures a mortgage. Their loan agreement explicitly states that the annual interest rate on their outstanding balance will be 4.25% for the life of the loan. This 4.25% is the contract rate because it is the specific interest rate that both the homeowners and the bank formally agreed to in their mortgage contract, making it the legally binding rate for their monthly payments.

• Business Services Contract:

  A freelance graphic designer enters into a contract with a client to create a new company logo. The contract includes a clause stating that any invoice not paid within 30 days of receipt will incur a late payment interest charge of 1.5% per month on the outstanding balance. This 1.5% monthly charge is the contract rate for late payments. It was mutually agreed upon and documented in the service contract, making it the enforceable rate should the client fail to pay on time.

• Installment Purchase Agreement:

  A consumer buys a new appliance on an installment plan from a retail store. The sales agreement clearly outlines that the purchase price will be financed at an annual percentage rate (APR) of 18%. This 18% APR is the contract rate because it is the specific interest rate that the consumer and the store agreed to for financing the appliance, as detailed in their written installment purchase agreement.