We had a borrowerexpress some concern over the default interest rate provision built into the commercial note we use.
His initial concern was over the time frame & whether or not once incurred, it stayed there forever. I had to call his attntion to the part that said the rate would apply until the default is cured.
His follow up concern was how many months he could go not making payments until the default rate was invoked. (This sounds like a guy you’d want on your books, rite?)
I answered as follows:
In theory the loan is in default once the grace period on the payment is passed, 11 days. I don’t know of anyone who will hold him to such a literal time deadline. Our policy is to wait 30 days before accruing the default rate. However if he becomes a consistant payment problem, the 11 day window may apply.
Addiitionally, there are any number of reasons the loan could be in default over & above the timely payments. For example, not paying the taxes, the insurance, transferring ownership, not maintaining the condition of the property exceeding the maturity date, are some that come readily to mind. Does this mean he automatically goes to the default rate if he’s a week late renewing his insurance coverage? While the technical answer is yes, in the real world he would have to seriously aggravate the lender to cause them to accrue the default rate in this case.
