Late Payment Interest Formula
Learn how simple monthly interest on an overdue accountancy invoice is estimated.
This calculator estimates interest using the original unpaid invoice balance, a monthly rate, and the number of full months overdue. It helps show the interest amount separately from the original balance.
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Total late payment interest
Where:
Multiply the unpaid balance by the monthly percentage rate and then by the number of full months overdue.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| I - Total late payment interest | Estimated simple interest for the overdue period. | currency |
| P - Overdue invoice amount | The unpaid invoice balance before interest. | currency |
| r - Monthly interest rate | The monthly rate from the applicable payment terms. | percent |
| m - Months overdue | The number of full months the balance has remained unpaid. | months |
Step-by-Step Calculation
Convert the rate to a decimal
A percentage is divided by 100 before it is applied to the balance.
monthlyRateDecimal = monthlyInterestRate / 100
Calculate interest per month
This gives the simple interest charge for one full month.
monthlyInterestAmount = overdueAmount * monthlyRateDecimal
Calculate total interest
The same monthly charge is applied for each full month.
latePaymentInterest = monthlyInterestAmount * monthsOverdue
Calculate the total due
Add the estimated interest to the original unpaid amount.
totalAmountDue = overdueAmount + latePaymentInterest
£10,000 overdue for 3 months at 1.5% monthly
Convert rate
1.5 / 100
0.015
Interest per month
£10,000 × 0.015
£150.00
Total interest
£150.00 × 3
£450.00
Total amount due
£10,000 + £450.00
£10,450.00
Final Result
Estimated late payment interest: £450.00. Estimated total due: £10,450.00.
Assumptions
- ✓Interest is simple, not compounded.
- ✓The original balance remains unchanged throughout the period.
- ✓Only full months overdue are included.
- ✓The entered rate is applicable to the invoice.
Limitations
- !Partial months and daily interest are not calculated.
- !Payments or credits during the overdue period are not reflected.
- !Fixed charges, recovery costs and tax treatment are excluded.
- !Contractual and legal entitlement can vary by circumstance.
Common Mistakes to Avoid
Entering an annual rate as though it were a monthly rate.
Applying the rate to a balance that has already been partly paid.
Including partial months when the calculator uses full months.
Assuming interest is compounded when this calculation uses simple interest.
Related Formulas
Frequently Asked Questions
How is monthly invoice interest calculated?
Multiply the overdue balance by the monthly rate, then by the number of full months overdue.
Does this formula compound interest?
No. It uses the original overdue balance for every month.
What rate should be entered?
Use the monthly rate stated in the relevant payment terms, contract or invoice, where applicable.
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