A late fee is a charge most lenders require when borrowers submit a loan payment after its due date. You will find late fees with all kinds of borrowing options/financial accounts. Before taking out a loan or any other financial product, it is essential to understand how exactly these fees will work and how they can affect you. It may also be helpful to learn about some tips on avoiding late payments in the first place.
How Do Late Fees/Late Penalties Work?
In most cases, you will find late fees when you sign up for a financial contract where you owe money. Typically, for the average consumer, this will be for loans, essential bills, and rental agreements. Whenever you sign up for a contract, your lender, landlord, or the corresponding business/service provider will have a due date for your repayment. Generally, most bills are due every month. It is up to the payer to keep track of their due dates.
It is also up to the payer to ensure that the payment gets to the payee before or on that due date. This detail is crucial to keep in mind when paying via a method that isn’t instantaneous such as mailing a check or some wire transfers. For example, if you have a credit card payment to make on the 23rd of every month and are mailing in a check for payment, you would have to send that check with enough time to arrive on the 23rd, not send that check in on the 23rd. If you miss a due date, the payee can charge you a late fee.
The amount of your late fee will vary depending on the terms that were given to you by a lender/financial institution or business. In most cases, late fees are usually a flat fee or a percentage of whatever bill you are paying. There are laws out there that limit how much can be charged on late fees; they must be reasonable. Generally, late fees can range between $10-$30. When it comes to most bills, that late fee will be added to whatever balance you owe, and you will have to pay both as soon as possible.
Before you sign up for a loan, credit card, or service, late fees will usually be stated in the paperwork of the agreement. Either way, it is up to you to be aware of these late payment possibilities.
What Are Some Financial Products That Can Have Late Fees?
There are several kinds of financial products and service types that can come with late fees, if the payer misses their payment. Here are some common examples:
Credit Cards
Credit cards are a type of revolving account which borrowers can use multiple times until their credit limit is reached. Credit cards will usually only have minimum monthly payments when they have a balance on them. And although the due date may stay the same, the monthly payments can change depending on the amount used.
If you miss payment dates on your credit cards, there will be credit card late fees which will be added to your credit card balances. Sometimes credit card issuers may have a grace period for late payments. There are several different credit card companies in the credit card market, so do your research.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) ensures that late fees must be ‘reasonable and proportional”. The proposed rule provides different caps on the amount a credit card company can charge on late payments for credit cards. This Act and other regulations help eliminate unnecessary upcharge/upcharges, also called otherwise illegal junk fee/fees.
Personal Loans
Personal loans are some of the most versatile loan options available; they can be used for almost any kind of expense. These loans can come in a variety of loan amounts and loan terms. In most cases, personal loans mean steady monthly payments until the loan is paid back in full. Personal loans can also have late penalties if not paid on time.
Student Loans
Student loans make it possible for students to get funding for their education. Like personal loan options, these loans are repaid in installments and can come with late fees if payments are not made on time.
Mortgages
Mortgages help finance the purchase of a home. These loans can have fixed or variable interest rates and are some of the longest loan options out there. The qualification process for a mortgage can also take a long time.
Payday Loans
Payday loans are extremely short-term lending options that make a small amount of funds available. With these loans, they have to be repaid in just a few weeks which may increase the pressure and likelihood of missing a due date.
Phone Bills
Most of us pay for our cell phone service every month. If you miss a due date and end up paying late, there will likely be penalty fees.
Rental Payments
Rent may be the largest payment most people have each month, and if a financial emergency happens, then they may be a little late on rent. Some landlords or leasing companies may charge a fee for late payments.
Utility Bills
Utilities can include heating, cooling, water, trash and recycling, electricity, and gas. Making late payments can mean penalties, and missing multiple payments can mean having utilities to be shut down.
Insurance
Most people have some kind of insurance, and there will be a required monthly payment with that. If you miss a monthly payment with your insurance, then there will be late fees.
Will I Know About Late Fees Upfront?
Yes! You should know whether a loan or bill will have a late fee attached to them. This info will be found usually in the loan contract/loan agreement. You should also be able to talk to your lender/service provider about what kinds of fees you can expect if you make late payments.
What Are Some Potential Consequences of Late Payments?
Making late payments will definitely have some negative consequences, other than the penalty fees that can come with it. Here are some other consequences that you should be cautious about when you make late payments:
Late Payments Can Hurt Your Credit Scores Significantly
The most significant factor that influences a credit score is payment history on your credit accounts; this includes any credit cards and loan options. A single late payment can stay on your credit reports for up to seven years. If you miss multiple payments, then that can really harm your credit. Having a bad credit score can impact your finances in several different ways.
Consistent Late Payments Can Lead to Loan Default
Late payments on a loan can eventually lead to default. Default occurs when a borrower misses several monthly payments or breaks the loan contract in anyway. Defaults, like late payments, will stay on your credit reports as well and can harm your credit score.
You May End Up Without Important Necessities
If you make multiple late payments, you may have important utilities or services shut off. If you miss rent late multiple times you may face eviction, which can follow you to your next rental.
You Will End Up in a Cycle of Playing Catchup
Usually, before taking out a loan or credit card, most people make sure they can make the required minimum payment due. However, a late payment, in some cases, may make a credit account or bill not affordable anymore. If that financial hardship leads to the next month, there could be even more fees, and then you could end up playing catch up with your debt.
How to Remove Late Payments on a Credit Report
Sometimes mistakes can happen with credit card issuers, lenders, and other businesses. When those mistakes show up on your credit report, it is important and up to you to fix them; here is how you can go about doing so:
Step 1: Draft a Dispute Letter and Contact the Original Debtor/Lender
Your first course of action is to get in touch with the original debtor, whether it’s your credit card issuer or lender, and inquire about any potential errors leading to the late payment. If the mistake lies with them, they can rectify the issue by liaising with the credit bureaus or providing you with the necessary documentation to resolve it on your own.
If you need to address the errors independently or if the inaccuracies originate from the credit
bureau(s), you will need to compose a dispute letter. This letter should outline the situation, clearly stating the error or inconsistency that requires correction. Depending on the number of credit bureaus involved, you may have to write a separate letter to each one. Alternatively, you can choose to submit your dispute online. When composing the dispute letter, include the following information:
- Your contact information, including your name, address, and phone number.
- Provide specific details regarding the late payment error, including the name of the issuer.
- Clearly explain why you are disputing the error.
- Include any supporting evidence of the error, such as information obtained from the original creditor.
If you require assistance, you can find various templates available online for free.
Step 2: Submit Your Letter or Initiate an Online Dispute with the Appropriate Credit Bureau
Once you have drafted your dispute letter, you need to mail it to the correct address based on the credit bureau that needs to address the issue. Alternatively, you can begin the dispute process online.
Step 3: Find Out About The Next Steps
Once you submit your letter/dispute, you should keep an eye out for resolution or updates. In some cases, you may have to submit additional documents. Credit bureaus have up to 45 days to get the investigation done once they receive your dispute. When they come up with a decision, they will have to let you know within 5 days.
How to Avoid a Late Payment Fee and Make Your Bill Payments On time
There are several strategies out there that can help you stay on track of making your loan and bill payments:
Set Up Automatic Payments
This is one of the easiest and sometimes the most effective things you can do to help make your payments on time. You can set up automatic payments from a checking account, and on the agreed-upon date, the funds will be automatically withdrawn for your payment. In some cases, you may be able to save money by setting up automatic payments.
One thing to keep in mind with these automatic payments is that you should be mindful of the date that funds are withdrawn and ensure that you have enough money. The last thing you want to do is have to deal with an overdrawn bank account and the penalties that come with that.
Set Up Some Kind of Reminder
This is also a simple way to avoid making late payments. Depending on the materials and technology that you use, there are several routes you can take to set up monthly reminders. For example, some people may set up reminders on a phone or use a calendar and write down the due dates for those payments.
Refinance Your Debt if It Becomes Unaffordable
If you find yourself making constant late payments because a loan is just not affordable anymore, then you can look into refinancing your debt. The goal of refinancing is to find a more affordable loan and one that fits your budget well. By refinancing, you could make new terms and a lower monthly payment on your loans. This may ensure you can make the required minimum periodic payment you may have on your debts. With credit cards, you can look at balance transfers if you have lots of credit card late fees and high-interest rates.
Start Budgeting
If you aren’t already doing so, then creating a budget can be another good way to keep track of your monthly bills. A budget forces you to allocate all the money you need towards your necessary expenses and can be a good reminder throughout the month of the essential payments you will need to make. If you haven’t budgeted before, the good news is that there are several easy ways to get started because templates and plans exist. There are also several budgeting apps that you can connect to your bank account and they do the work for you!
References:
CFPB Proposes Rule to Rein in Excessive Credit Card Late Fees | CFPB