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What Is a Default Charge?

A default charge is a financial penalty imposed when someone fails to meet the terms of a loan or credit agreement, often triggered by missed payments. It's designed to compensate the lender for the increased risk and administrative costs. Understanding these charges can save you money and stress. How might they affect your financial health in the long run? Let's explore.
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum

A default charge is a type of fee or charge that is added to a customer account when the client has failed to comply with the terms and conditions governing a legal agreement with another party. Typically, this type of charge is not applied until certain events found in the contract have come to pass and the client is considered to be in default of those provisions. While this type of charge may be found in a number of different types of contracts, the default charge is most commonly applied to specific situations that arise with a lease on a piece of real estate.

It is important to note that a default charge may actually represent several different fees and charges that are applied to a customer account after that client is declared to be in default on some type of legally binding agreement. Typically, this collection of charges will include fees related to the attempts of the provider to aid the client in getting back on track with missed payments or other factors that have led to the breach of contract situation. The default charge does not replace any other types of punitive charges and fees that are outside the scope of the charge itself, but are assessed in addition to those other stand-alone fees.

One of the more common examples of how a default charge functions is to consider a situation if a tenant begins to miss payments on a lease involving an apartment or rental home.
One of the more common examples of how a default charge functions is to consider a situation if a tenant begins to miss payments on a lease involving an apartment or rental home.

One of the more common examples of how a default charge functions is to consider a situation if a tenant begins to miss payments on a lease involving an apartment or rental home. Typically, the landlord will make reasonable efforts to work with the tenant to incrementally catch up on the back payments, possibly exercising the right to apply some sort of interest and penalties to the balance owed in arrears on the tenant’s account. The scope of those efforts will be governed by the contents of the lease agreement and any local laws that may have to do with the rental of property and the processes necessary for eviction. If all reasonable efforts are made and the tenant still fails to pay the amount in arrears, the landlord may declare the tenant to be in default and assess a default charge on any amount due up to the date of the declaration.

Default charges are often governed by the contents of a rental agreement.
Default charges are often governed by the contents of a rental agreement.

The actual amount of a default charge will vary, depending on local laws and the provisions found within the lease agreement. In some jurisdictions, the requirement is that the charge must be stated in terms of a flat or fixed rate. At other times, the default charge may be a percentage of the amount of the arrears, but not be allowed to exceed a certain amount. Depending on the circumstances that determine the amount of the default charge, this additional assessment may be enough to offset at least some of the costs landlords incur when having a client legally evicted, or provide no more than a token amount that may or may not eventually be collected through a court system.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Learn more...

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    • One of the more common examples of how a default charge functions is to consider a situation if a tenant begins to miss payments on a lease involving an apartment or rental home.
      By: william87
      One of the more common examples of how a default charge functions is to consider a situation if a tenant begins to miss payments on a lease involving an apartment or rental home.
    • Default charges are often governed by the contents of a rental agreement.
      By: andiafaith
      Default charges are often governed by the contents of a rental agreement.