Q:

How do you calculate late fees?

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Quick Answer

The Bureau of the Fiscal Service, a division of the U.S. Department of the Treasury, provides a monthly compounding interest calculator. This online calculator allows people to automatically determine the amount of monthly compounding interest owed on payments made after the payment due date.

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How do you calculate late fees?
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Full Answer

To use this calculator, individuals must enter the numbers of days late, the number of months late, the amount of the invoice in which payment was made late and the "Prompt Payment" interest rate, which is pre-populated in the box. If a payment is 30 days late or fewer, borrowers can use the simple daily interest calculator, also available on this site.

Before a business can charge customers a late fee, they must first spell out the terms of the finance charge in writing. The first invoice sent must include a due date. This can be as simple as “net 30 days” or a specific due date at the bottom of the invoice. The percentage amount is clearly stated, and the customer must also be informed that past-due bills incur a late fee.

Most accounting software calculates finance charges, but knowing the process is helpful for both business owners and customers. The finance percentage should be calculated based on a full month. First, the daily percentage rate is determined. If the finance charge is 2 percent per month, that amount is multiplied by 0.03, which results in 1/30th of 2. This gives a daily rate of 0.06 percent. The amount due is multiplied by the daily rate. For example, if $200 is owed, then 200 is multiplied by 0.06 to get a daily finance charge of $1.20. If the payment is 20 days late, the charge is $1.20 for 20 days, for a total of $200 plus $24 in finance charges.

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