David w. T. Carroll, Esq.
Carroll, Ucker & Hemmer LLC
7100 North High Street, Suite 301
Worthington, Ohio 43085
fax: (614) 547-0354
Frequently a business will send invoices stating that "unless payment is made within thirty days, interest will be charged at the rate of 1½ percent per month" or similar language. Can the business charge such an interest rate in that fashion?
Revised Code Section 1343.03(A) provides that a creditor is entitled to interest at the "legal rate" of interest (which changes annually) on any money due on an account "unless a written contract provides a different rate of interest...." R.C. 1343.03. The legal rate of interest, as of July 1, 2004, is the "federal short term rate" set by the Ohio Tax Commissioner pursuant to RC 5703.47 and available on the Ohio Department of Taxation web site. The legal rate of interest is simple interest. That is, the interest does not compound. To charge a rate of interest different from the statutory rate, there must be a written contract stating a different rate of interest. Otherwise, the creditor may charge only the statutory rate of simple interest and may not compound the interest.
If the debtor has been receiving invoices containing a recited interest rate, but there is no contract agreed by both parties that states an interest rate, the non-statutory interest rate may not be legally collected according to the Franklin County Court of Appeals in Hobart Bros. Co. v. Welding Supply Serv., Inc. (1985), 21 Ohio App. 3d 142. Statements on invoices that service charges will be assessed on past due balances are insufficient to create the written contract required by statute. The Ohio Supreme Court affirmed this principle in Minster Farmers Coop. Exchange Co., Inc. v. Meyer, 117 Ohio St. 3d 459, 2008-Ohio-1259, which reversed Minster Farmer's Cooperative Exchange Co, Inc. v. Meyer (3rd Dist App.), 2006-Ohio-1886, and Minster Farmer's Cooperative Exchange Co, Inc. v. Dues (3rd Dist App.), 2006-Ohio-1887.
However, even without a written contract stating a rate of interest, the legal rate of simple interest may be charged. Simple interest is never compounded. For example, on a $100 invoice at 10% simple interest, $110 is due in one year, $120 is due in two years and so on. Interest is applied only to the unpaid principal balance, not to unpaid interest.
The moral of the story is that if you want to charge more than the legal rate of simple interest on an unpaid invoices, you must have a written contract signed by both parties specifying the greater rate and compounding method to be charged.
For more information, email David W. T. Carroll
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Ucker & Hemmer LLC