The Interest Rate in Contracts

The Ohio Supreme Court issued another business litigation decision this past week concerning the interest rate that a company or person must pay when they fail to pay on a contractual obligation. The case of Mayer v. Medancic concentrated on whether that interest rate can be a "simple" interest rate or an interest rate that allows for the "compounding" of interest. If it is a "simple" interest rate, then all the unpaid amount generates is interest only. If it is a "compounding" interest rate, then interest runs on the original unpaid amount - plus the previously unpaid and accrued interest. For example, if the unpaid amount is $10,000.00, and the contract between the parties just states that the interest rate is 8% (i.e. it does not specify whether or not it is a simple interest rate or a compounding interest charge), then the unpaid amount generates only $800.00 in interest per year. However, if the contract in this example specifically states that the interest rate on the unpaid amount is 8% to be compounded annually, then at the end of each year, the $800.00 interest incurred is added to the $10,000.00 principal, and 8% interest thereafter is earned on a now increased principal amount of $10,800.00. Obviously, a written agreement that calls for a compounding interest rate is going to generate a much larger overall amount of interest than a written agreement that either specifically calls for a simple interest rate or is silent on the matter. Suggestion, read your contacts and loan agreements very carefully on how interest is to be charged if a party defaults - especially of the compounding language calls for the interest to be compounded quarterly or even monthly.
It must also be pointed out that the interest rate statute has a number of specific provisions on what the statutory or limited interest rate may be for any specific written agreement. The amount of interest rate to be charged under the statute can very depending on what type of written document is involved. That topic is for another post and is not specifically discussed here.