Ordinary and default interest: two clauses, two functions
Ordinary interest is the price of money over the life of the credit; default interest compensates for the default and pressures the debtor to pay. They must be agreed separately, each on a clear base: default interest runs only on past-due and unpaid principal, from the day after the due date (CCom 362). Charging both on the same amount simultaneously, or default interest on interest, is the classic recipe for a judge to strike down the whole clause.
How much is reasonable?
Common practice sets default interest as a multiple of the ordinary rate (1.5×–2×). The real ceiling is not a number but the usury doctrine: judges analyze the rates of credit instruments on their own motion and reduce the notoriously excessive ones using market parameters — with the highest CAT (Costo Anual Total, Mexico's all-in APR) of similar transactions as a reference (1a./J. 46/2014, 47/2014 and 57/2016). A 10% monthly default rate “so that it hurts” intimidates no one in court: it gets reduced, and along the way it undermines your position.
And if the contract is silent? In commercial matters the statutory fallback rate of 6% per year applies (CCom 362); in civil matters, the legal rate of 9% (CCF 2395). That is why silence is a bad deal for the creditor: always stipulate.
Anatocismo: the fine line
Can interest generate interest? It depends on the regime and on when the agreement is made:
- Civil: agreeing to capitalization in advance is void (CCF 2397); it can only be agreed after the interest has accrued.
- Commercial: CCom 363 says that past-due and unpaid interest does not accrue interest, but it allows the contracting parties to capitalize it — the SCJN upheld capitalization agreements in commercial transactions in 1998, a ruling that has been controversial ever since.
House position: avoid capitalization agreed in advance. Simple default interest on the past-due balance, properly calculated, protects just as well and gives the debtor nothing to attack in court.
If you are the one being charged
On the other side of the table, four checks before accepting any balance with default interest:
- Only on what is past due: default interest runs from the day after the due date and only on the unpaid principal — not on the whole debt, and not on interest.
- What does your contract say? If no default rate was agreed, the commercial statutory fallback is 6% per year (CCom 362) — not whatever the creditor decides that day.
- Abusive rates get reduced: if you are sued over a disproportionate default rate, the judge must analyze usury even if you don't raise it, and trim the excess.
- Ask for the breakdown: principal, ordinary and default interest separately, with dates. Reproduce the calculation in our default interest calculator; if the numbers don't add up, there is a conversation to be had before you pay.
Anatomy of a clause that works
- Base: "on the past-due and unpaid principal…"
- Rate and period: "…default interest of X% per month…" (a clear number, no obscure formulas).
- Start and end: "…from the day after the due date and until full payment."
- No capitalization and no simultaneous charging of ordinary interest on what is past due.
- Application of payments: an agreed order (expenses → default interest → ordinary interest → principal) to eliminate balance disputes.
Run the numbers before signing — the default interest calculator shows how much a past-due balance grows at the rate you agree to — and remember: the best default interest is the kind that never gets charged because origination was done right.