Legal Definitions - legal rate

The legal rate refers to an interest rate that is established by statute or regulation. This rate serves as a default when parties have not agreed upon a specific interest rate, or it may set a maximum allowable rate to prevent excessive charges, or it can be the rate applied to monetary judgments awarded by a court. It ensures fairness and provides a standardized benchmark for financial obligations where a specific rate is not otherwise determined or permitted.

• Example 1: Unpaid Invoice Default

  Scenario: A small business provides consulting services to a client. Their standard invoice states payment is due within 30 days, but it doesn't specify an interest rate for late payments. The client pays 60 days late.

  Illustration: In this situation, if the small business decides to charge interest for the overdue payment, they would typically be limited to the legal rate of interest established by their state's law. Since no contractual rate was agreed upon, the statutory rate provides a default standard for calculating the interest owed on the late payment.

• Example 2: Maximum Allowable Loan Interest

  Scenario: A state legislature passes a law to protect consumers from predatory lending practices, particularly concerning short-term, high-risk loans. The law caps the annual interest rate that lenders can charge on such loans.

  Illustration: This cap represents a legal rate – specifically, a maximum legal rate. Lenders cannot charge interest above this statutory limit, even if a borrower agrees to it, because the law deems higher rates to be usurious or exploitative. This legal rate protects consumers by setting an upper boundary for borrowing costs.

• Example 3: Post-Judgment Interest

  Scenario: A court rules in favor of a plaintiff in a breach of contract case, ordering the defendant to pay $50,000 in damages. The defendant does not pay immediately, and it takes several months for the plaintiff to collect the judgment.

  Illustration: The court judgment will typically accrue interest from the date it was entered until it is fully paid. The rate at which this interest accrues is often the legal rate, or a specific post-judgment interest rate, set by state or federal statute. This ensures that the plaintiff is compensated for the time value of money lost while waiting for the judgment to be satisfied.