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Contract trap · Loan and credit

Penalty APR, fee pyramiding

A late fee plus a daily penalty on the overdue amount, re-pricing of the whole balance to a 'penalty'/'default' APR of 29.99%+ (RU: loss of the льготная ставка), interest on unpaid interest, fees on fees ('pyramiding'), payment allocation 'at our discretion' that applies your money to fees first, and a 25-33% 'collection fee' or attorneys' fees on any default.

Severity
Serious
How often it turns up
Common
Holds up?
Depends where you are
Clause phrases
33

What it looks like in a contract

Redline matches these phrases against your document verbatim. Drafters rarely invent new wording — they copy it, which is why the same sentences turn up across unrelated contracts.

In English-language contracts

  • returned payment fee
  • fees are added to the balance and accrue interest
  • interest will continue to accrue
  • late payment fee
  • penalty APR
  • late fee
  • Penalty APR
  • default rate
  • we may increase your APR
  • until you make six consecutive on-time payments
  • interest on interest
  • compounded
  • we apply payments and credits at our discretion
  • collection fee
  • % of the outstanding balance as attorney's fees
  • costs of collection
  • per day on the overdue amount

In Russian-language contracts

  • неустойка начисляется ежедневно
  • повышенная ставка при просрочке
  • пеня начисляется на сумму задолженности
  • штраф за просрочку
  • неустойка в размере
  • пеня в размере 20%
  • 0,1% от суммы просроченной задолженности за каждый день
  • повышенная процентная ставка
  • утрата права на льготную ставку
  • прекращение действия дисконта
  • капитализация процентов
  • проценты на проценты
  • в первую очередь погашаются неустойки
  • расходы по взысканию задолженности
  • все расходы Кредитора, связанные с взысканием
  • услуги коллекторского агентства оплачиваются Заемщиком

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Why it bites

On a RUB 30k microloan, a 20%/yr penalty stacks on 0.8%/day interest and collection fees; one slip raises the rate on the whole balance, sometimes indefinitely; fee-first allocation keeps you 'late' every month; fee-shifting is one-way.

Is it enforceable where you are

The same clause can be routine in one country and void in another. What follows is what the law says where you are — not advice on your particular contract.

In the US, TILA/Regulation Z governs disclosure and the CFPB polices unfair practices; in the EU, the Consumer Credit Directive and Directive 93/13 apply, and the CJEU has repeatedly struck price and rate clauses that a borrower could not have understood.

United States

CARD Act / Reg Z 1026.55: existing balances re-priced only after 60+ days' delinquency with 45-day notice and restored after six on-time payments (1026.59); late fees must be 'reasonable and proportional' (1026.52(b)); FTC Credit Practices Rule 16 CFR 444.4 bans pyramiding late charges; FDCPA §1692f(1) allows collector fees only if authorised by contract and law; several states cap attorney fees at 15-20% of principal.

  • Cited
  • 16 CFR 444.4
  • FDCPA §1692f
  • FTC
  • Reg Z 1026.55

European Union

93/13 Annex 1(e) — disproportionately high compensation; CJEU C-415/11 Aziz (2013) compares default interest with the statutory rate; C-96/16 and C-94/17 Banco Santander (2018) presume default interest more than 2 points above the ordinary rate unfair; compounding restricted in many Member States; costs controlled by courts.

  • Cited
  • 93/13 Annex 1(e)
  • C-415/11
  • C-94/17
  • C-96/16

United Kingdom

CONC 7.7.5 — default charges must reflect actual costs; HCSTC: £15 default-fee cap, 100% total-cost cap and simple interest only (CONC 5A); CRA 2015 Sch 2 para 6.

  • Cited
  • CONC 5A
  • CONC 7.7.5
  • CRA 2015 Sch 2 para 6

Russia

Unilateral rate increases banned (ст. 29 ФЗ о банках; 353-ФЗ ст. 5 ч. 16); any 'повышенная ставка' on arrears is a неустойка capped at 20% годовых (if interest keeps accruing) or 0.1%/day (353-ФЗ ст. 5 ч. 21); ст. 5 ч. 20 fixes the allocation order (overdue interest → overdue principal → penalty → current interest → current principal → other); loans ≤1 year: interest, penalties and fees capped at 100% of principal (ст. 5 ч. 24 as amended by 545-ФЗ от 29.12.2025; 130% before); courts award only proven reasonable costs (ГПК ст. 98, 100); исполнительский сбор fixed at 7% by law (229-ФЗ); ГК ст. 333.

  • Cited
  • 229-ФЗ
  • 353-ФЗ
  • 545-ФЗ
  • ГК ст. 333
  • ГПК ст. 98
  • ст. 29
  • ст. 5 ч. 16
  • ст. 5 ч. 20

Where this has actually happened

Regulator actions, court rulings and the contracts they were fought over.

  • Долями (Т-Банк BNPL), Правила (2026): штраф 0,055% в день от неоплаченной Доли, но не более 20% годовых
  • Займер, Общие условия договора потребительского займа (2026): пеня 20% годовых на просроченную задолженность
  • Credit CARD Act of 2009 (US) — curtailed 'universal default' re-pricing of existing balances
  • CJEU C-415/11 Aziz v Catalunyacaixa (2013) — 18.75% default interest reviewed for unfairness
  • Discover Cardmember Agreement (2026): 'If we use an attorney to collect your Account, we may charge you our legal costs as permitted by law'

What to do

In order, from the thing that takes a minute to the thing that takes a letter.

  1. Find the penalty-APR trigger and cure condition (US: six consecutive on-time payments)
  2. Set autopay for at least the minimum
  3. Check the caps (RU: 20% годовых or 0.1%/day and the 100% total-cost cap for loans ≤1 year
  4. UK HCSTC £15 and 100%)
  5. Verify the allocation order (RU 353-ФЗ ст. 5 ч. 20 fixes it)
  6. Refuse percentage-based collection fees
  7. Ask the court to reduce the penalty (ГК ст. 333).

Check your own document

Traps that travel with it

Drafters who use one of these usually use several.

79 traps · 1789 verbatim clause phrases