How to Charge Interest on Overdue Invoices

To charge interest on overdue invoices, confirm your contract terms, check the legal interest limits in your state, calculate the daily or monthly interest rate, and add the interest line directly to the updated invoice. Then notify the client with a clear explanation of the charge and send the revised invoice for payment. This guide shows you exactly how to do each step so you stay compliant and get paid faster.

Verify That Your Contract Includes a Late-Fee or Interest Clause

You cannot legally charge interest unless your original agreement states it clearly. Review your contract, proposal, or service terms.

Include the following in your contract:

• A statement that overdue invoices incur interest
• The exact interest rate (e.g., 1.5% per month)
• When interest starts accruing (example: after 30 days past due)
• How interest is calculated (daily or monthly)

Example clause: "Invoices not paid within 30 days will incur interest at a rate of 1.5% per month (18% annually), calculated on the outstanding balance."

If your existing contracts don’t include this clause, update them before trying to charge interest on future invoices. You cannot retroactively apply fees that customers never agreed to.

Check Local and State Laws for Maximum Allowed Interest Rates

Interest charges are regulated. Every region has its own maximum legal rate.

Before applying interest:

• Verify your state’s or country’s legal limit
• Make sure your rate complies with consumer protection laws
• Confirm whether late fees and interest are treated differently in your area

Example: Some U.S. states cap late payments at 1.5% per month, while others allow up to 2%.

If you're unsure, consult a bookkeeper, accountant, or attorney so you stay compliant.

Set Your Late Payment Interest Rate

Once you know your legal boundaries, choose a rate that is fair but firm.

Common business rates:

• 1% per month (12% annually)
• 1.5% per month (18% annually)
• 2% per month (24% annually)

Avoid setting it extremely high—courts can reject “unreasonable” rates.

Formula for monthly interest:
Interest = Outstanding Amount × (Interest Rate ÷ 100)

Example:
Invoice amount: $2,000
Interest rate: 1.5% per month

$2,000 × 0.015 = $30 interest added each month

Calculate the Exact Interest Amount

Choose whether you calculate interest:

• Monthly
• Daily
• One-time penalty fee

Daily interest formula:
Daily Rate = Annual Rate ÷ 365
Interest = Amount × Daily Rate × Days Late

Example (Daily Calculation):
Invoice: $1,500
Annual rate: 18%
30 days late

Daily rate = 0.18 ÷ 365 = 0.000493
Interest = $1,500 × 0.000493 × 30 = $22.19

Use the calculation method that matches your contract terms.

Add the Interest Line to Your Invoice

Once you calculate the amount, add it to your updated invoice.

Include:

• Original amount due
• New interest line item
• Total due including interest

Example invoice line item:
"Late Payment Interest – 1.5% for 30 days past due: $22.19"

Also include a note reinforcing your policy, such as:
“Interest calculated per the payment terms agreed to in your service contract.”

This helps you remain transparent and reduces conflict.

Send a Polite Reminder Before Charging Interest

Always notify the customer before applying interest—this keeps the relationship professional.

Example reminder message:
“Your invoice #1043 is now 15 days overdue. As outlined in our contract, overdue invoices incur a 1.5% monthly interest charge. Please submit payment by Friday to avoid additional fees.”

This gives them a chance to pay before interest is added and avoids disputes.

Issue a Revised Invoice With the Added Interest

If the due date passes, send a revised invoice that includes:

• The original invoice number
• Date interest was applied
• Full breakdown of interest
• Updated total amount due
• Updated due date

Example note on revised invoice:
“Interest has been added according to the terms of our agreement. Please see the breakdown below.”

Attach the interest calculation if needed.

Automate Interest Charges Using Accounting or Invoicing Software

Most modern invoicing tools allow you to:

• Automatically apply interest after a certain number of days
• Set custom late-fee rules
• Trigger automatic reminder emails
• Prevent forgotten or inconsistent applications

If you rely on invoicing heavily, automation saves hours and reduces awkward conversations.

Follow Up Professionally Until the Invoice Is Paid

Continue following up firmly but respectfully.

Recommended follow-up pattern:

• 1–3 days late → friendly reminder
• 7 days late → second reminder with interest warning
• 14–21 days late → revised invoice with interest
• 30–60 days late → discuss payment plan
• 60–90+ days → collections or legal options

Document every communication to protect yourself if you escalate.

Use DepositFix If You Want Simpler Automated Billing and Payments

If you want to avoid overdue invoices altogether, DepositFix helps you automate customer payments through secure billing links, recurring charges, and invoice payments. With automated payment collection and reminders, you reduce the risk of late payments and eliminate the need to charge interest in the first place.