Late Payment Fees: When They’re Legal, When They’re Not, and How to Fight Them

by the FairShake Team

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Jose Rivera paid a monthly rent of $2,699 for his home in California, which he rented from Invitation Homes, a company that rents single-family homes across the country. Invitation Homes required tenants to pay their rent via an online portal, which tenants complained would malfunction and fail to process some of their rent payments. And if rent was so much as one hour late, Invitation Homes assessed a $95 late fee.

Rivera did the math and realized that the late fee represented a 642 percent annual interest rate on his rent payment. To him, it seemed excessive, so he filed a lawsuit. “The penalty is illegal, and thus, void, because it is excessive and bears no relation to any actual damages incurred by [Invitation Homes] when rent or other fees are paid late,” his lawsuit read. “Some people have been evicted purely as a result of this late rent penalty, and in particular, this penalty stacking practice.”

Rivera’s lawsuit has become a class-action suit, with Invitation Homes tenants from all over the country joining together to fight what they say are excessive and unfair late fees charged by the rental company. It’s still working its way through the courts.

Stories like this one illustrate a somewhat common debate about late fees: When are they fair? Is it legal for entities like landlords to charge large late fees? Do consumers always have to pay the late fees they’re charged with?

The answers to those questions can get complicated, and they vary by location because different states and local jurisdictions have different laws about late fees. But as always, the best way to protect your money and yourself as a consumer is to be as educated as possible about your rights, and we’re here to get you started. Read on to learn:

  • What are late payment fees?
  • Are late payment fees legal?
  • How can you avoid late payment fees?
  • How can you fight back if you’re charged with late payment fees unfairly?

What Is a Late Payment Fee?

A late payment fee is a penalty that’s charged when you don’t pay a bill on time. Some companies and entities that commonly charge late payment fees include:

  • Landlords or property managers
  • Utilities
  • ISPs and cell phone providers
  • Credit card companies
  • Lenders
  • Medical offices
  • Contractors

Keep in mind, though, those are just some of the most common. Almost any business can charge late fees to customers who miss billing deadlines.

Typically, late fees must be agreed upon in advance by the customer. That means that the exact amount and structure of the late fees must be laid out in a service agreement, contract, or lease that is reviewed and signed by the consumer. Companies can’t just charge any late fee without warning.

It’s also important to note that late fees and interest are not the same thing. For example, a credit card can charge you interest on an account balance even if you make all of your payments on time. A late fee is generally a flat fee that’s assessed once a billing deadline passes without the consumer making any payment.

When Is a Payment Considered Late?

Generally, a payment is considered late and a late fee may be assessed as soon as the date that the payment is due passes.

The contract or agreement that specifies the late fee may get more specific about this. For example, a payment like a monthly rental fee may be due by the end of the landlord’s business hours, and be considered late if it’s paid after that pre-established time (say, 6 p.m.). The agreement may also offer a grace period, when the payment is technically “late,” but can still be made without assessing any late fees.

For the most part, there aren’t specific rules about how late payment fees can be structured, as long as they’re outlined and agreed upon by both parties in advance. But even in the case of a signed contract agreeing to late fees, they might not be legal.

Is It Legal to Charge Late Fees?

In short, yes. Late fees are perfectly legal.

Where this becomes a gray area is how much of a late payment fee is legal. While there are no federal laws limiting what most companies and entities can charge as late fees, a number of state courts have ruled that “excessive” late fees may be unenforceable. Where this gets into even more of a gray is when you try to define what counts as an “excessive” late fee.

Some states have established rules, either through legislation or their courts, that cap late fees at a certain percentage of the billing charge. But this varies wildly from place to place, so it’ll take some research to know exactly what the rules are where you live.

The CARD Act

The one exception to all of this is credit card companies.

The CARD Act is a federal law that went into effect in 2010 that establishes a wide range of consumer rights related to credit cards — including the fees they can charge. Some of the rules set forth by the CARD Act include:

  • Late fees cannot ever exceed the cardholder’s minimum payment;
  • Cardholders cannot be charged more than one penalty fee for the same event (meaning a late payment can be subject to only one late payment fee);
  • Late fees can’t exceed $25 unless one of the cardholder’s previous six payments was also late, or the credit card company can prove that the costs it incurred because of the late payment justify a higher penalty.

How to Avoid (Or Deal With) Late Fees

Of course, the best way to deal with late fees is to avoid having them charged in the first place. But life happens, and sometimes a late fee is unavoidable. Here are some of the best strategies for avoiding and dealing with late fees.

Pay Your Bills On Time

This one is a little bit obvious, but the best way to handle late payment fees is to just avoid them in the first place, and the easiest way to do that is to ensure your bills get paid on time. For recurring payments, set up automated payments if you can. If autopay isn’t an option, use a calendar app to send yourself payment reminders. If you ever change addresses, make sure to update your address on all your accounts, so you never miss a bill that gets sent by mail.

Pay Bills Online Whenever Possible

The CARD Act that we mentioned earlier does give consumers a little more leeway when it comes to credit card bills paid by mail, and it’s pretty standard practice for entities to accept payments as on-time if they’re postmarked by the date payment was due. But this isn’t the case 100 percent of the time, and to avoid postal delays (and the cost of postage), it’s a good practice to pay bills online whenever possible.

If You Incur a Late Fee, Pay the Bill Right Away

While the best strategy is to avoid being charged late fees, sometimes bills just can’t be paid on time. If you ever do incur a late payment fee, you should pay the bill as soon as possible to avoid any recurring fees for further late payment.

Even if you intend to fight the late payment fee, pay the bill itself immediately to show goodwill and to avoid further penalties.

Negotiate a Fee Waiver

If you’ve been charged a late payment fee, you don’t necessarily need to pay it without a fight. You can always reach out to the company that assessed the charge and ask for a waiver.

Obviously, with this tip, your mileage will vary. Some companies will refuse waivers, whatever the circumstances may be. But especially if you’ve been a long-term customer with a solid history of making payments on time, you might be able to make a convincing case for have the penalty waived for a one-time lapse. And regardless of the circumstances, it never hurts to ask — the worst that can happen is they say no.

Always Save Proof of Payment

And lastly, whether you pay a bill online, by mail, or via another method, always make sure to save proof that you made your payment. This is your first line of defense in case you get charged an unfair or erroneous late payment fee — but more on that below.

How to Handle an Unfair Late Fee

Even for a consumer who does everything right, unfair or unwarranted penalties can happen. Businesses make mistakes. Payments can get delayed because of delivery or system failure. If you’re ever charged a late payment fee that you think is unfair or erroneous, here are some steps you can take.

Contact the Business

When seeking to resolve a dispute with a business, the first step should always be to reach out to the business directly.

Reach out to their customer service department and explain your dispute. If possible, do this in writing so you can save a record of the entire conversation. If the late payment fee was actually unfairly charged or charged in error, the company should be able to reverse it. If they refuse to, don’t worry — you still have options.

Contact Your Card Issuer (If You Paid With a Card)

This is another benefit to making payments online whenever possible: You can pay with a credit card, which comes with better consumer protections than most other forms of payment.

If you had a late payment fee unfairly charged to a credit card and the company refuses to reverse it, you can initiate a chargeback. This means that you’ll submit evidence that the charge is incorrect or unfair to your credit card company, and if they agree, they can reverse the charge for you.

Consider Consumer Arbitration

If you’ve exhausted other options for fighting an unfair late payment fee, and want to recoup money you’ve lost, one potential avenue is consumer arbitration.

Arbitration is similar to the court system. You’ll create an official complaint against the company, and meet with an independent third party, called an arbitrator, who will hear your side and theirs before making a legally binding decision to resolve the dispute.

For anyone who’s never gone through the arbitration process before, it can seem overwhelming. But there’s help for consumers who are seeking justice. FairShake uses a combination of automation and independent review to help streamline the arbitration process and guide consumers through it. Ready to get your fair shake? See how FairShake can help


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