Late Payment Interest in Contracts: When Is It Too High, and How Can You Protect Yourself?

Quick Overview

• The contract may specify a different rate for late-payment interest than the statutory rate; however, the amount must not exceed the limits set by law and good morals.
• If the parties do not agree on the interest rate, the statutory default interest rate applies.
• The statutory rate is determined based on the CNB’s repo rate in effect on the first day of the relevant calendar half-year, increased by 8 percentage points.
• The calculation of default interest depends on the amount of the debt, the annual rate, and the number of days in default.
• An extremely high rate may be deemed unreasonable by a court; however, this always depends on the circumstances of the specific case.

Not sure if the late payment interest in your contract is reasonable? Have a lawyer review the contract before you sign it. We’ll review not only the late payment interest but also contractual penalties and other provisions that could pose an unnecessary risk to you.

How to Avoid Getting Burned When Signing a Contract

Signing a contract without reading it thoroughly is like jumping into water without knowing how deep it is. It may seem like a formality, but the fine print and legal language can hide terms that will cost you a lot of money later on—such as extremely high late payment interest rates.

The most important rule? Always read the entire contract, including addenda and attachments. Pay close attention to the provisions regarding late-payment interest. If the contract specifies an interest rate significantly higher than the statutory rate (currently approximately 12% per year), be on your guard. Contractual interest rates may be higher, but they must not be unreasonable —for example, 1% per day is already considered invalid by the courts.

Also, check to see if the contract contains any hidden fees or penalties for late payment. If you are unsure, consult a lawyer about the contract.

Remember: By signing the contract, you accept responsibility for its terms. It’s better to spend a few minutes reviewing it now than to deal with financial problems later.

How is late payment interest calculated?

The calculation of late payment interest is based on the amount owed, the applicable annual interest rate, and the duration of the delay. In simple terms, the following formula can be used:

amount owed × annual interest rate × number of days in default / 365

Example: A debtor fails to pay 100,000 CZK, and the statutory rate is 11.75% per year. If the delay is 30 days, the interest amounts to approximately 966 CZK:

100,000 × 0.1175 × 30 / 365 = approximately 966 CZK.

For contractual interest, the calculation is based in the same way on the rate agreed upon in the contract. It is therefore always necessary to check whether it is specified as an annual, monthly, or, for example, daily rate.

Watch out for hidden traps: How can a contract bind you to exorbitant interest rates?

Many people sign a contract without thoroughly reviewing all the terms and conditions, and only later discover that they face extreme late-payment interest rates. As we’ve already mentioned, the statutory late-payment interest rate is around 12% per year. However, the contractual interest rate can be set significantly higher—sometimes to the point of being ruinous. This means that the debt can multiply within a few months.

Automatic contractual penalties are also dangerous, as they add further penalties to late payments. The creditor can thus collect not only interest but also contractual penalties, which can quickly increase the amount owed. If you find yourself in such a situation, you can defend yourself.

First, check whether the interest rate complies with the contract. If the interest rate has not been agreed upon, the statutory rate applies. If you suspect the interest rate is unreasonably high, contact the creditor and try to reach an agreement—a reduction in the interest rate is often more advantageous than a protracted legal battle. If an agreement fails, verify whether the interest rate violates public policy —Czech courts have ruled on several occasions that unreasonably high interest rates are invalid. It is crucial to act quickly and not let the debt grow.

Is the creditor demanding an amount that has grown significantly due to interest and penalties? An attorney can review the contract, recalculate the interest charged, and assess whether it makes sense to legally challenge the amount.

Areas with High Late Payment Interest Rates: What to Watch Out For?

High late payment interest rates most often occur in areas where the borrower is at a disadvantage or where lenders try to take advantage of the client’s lack of legal knowledge. A typical example is non-bank loans, where late payment interest can reach extreme levels. Some contracts even include a daily interest rate, which, when annualized, amounts to hundreds of percent in additional interest.

Another area of risk involves rentals and leases, where penalties for late payments can be surprisingly high. In commercial contracts between businesses, on the other hand, it is common for the parties to agree on interest rates significantly higher than the statutory rate as an incentive for timely performance.

Case Law on Excessive Interest Rates: When Will the Court Intervene?

Courts in the Czech Republic have repeatedly addressed cases involving unreasonably high late payment interest rates. For example, in its ruling, Case No. II. ÚS 3194/18, the Constitutional Court stated that extremely high late payment interest rates are unconstitutional and contrary to public policy. Courts may therefore reduce unreasonably high interest rates to an acceptable level if they find them to be contrary to the principles of justice.

The case at hand involved a debt of 25,000 CZK, for which a contractual late payment interest rate of 1% per day—equivalent to 365% per year—had been agreed upon. After several years, the amount owed had risen to more than 900,000 CZK due to the interest. The Constitutional Court addressed, in particular, the question of whether it is possible to intervene against extremely high interest rates even during enforcement proceedings.

The Constitutional Court concluded that such high default interest rates are disproportionate and unconstitutional. It reasoned that while contractual autonomy allows for the agreement of higher interest rates, these must not be ruinous for the debtor. The Court emphasized that default interest serves a motivational function but must not be used to enrich the creditor at the expense of the weaker contracting party.

The Constitutional Court also referred to the principle of consumer protection, which is based on both Czech law and European legislation. It stated that interest rates must not lead to excessive indebtedness that would place the debtor in an insurmountable situation.

As a result, the Constitutional Court ruled that the interest charged was contrary to good morals and overturned the lower courts’ decisions, which had sided with the creditor. This decision is important for similar cases because it confirms that courts can and should review the reasonableness of contractual penalties and prevent abuses to the detriment of debtors.

Summary

It is necessary to review the late-payment interest provisions in a contract before signing it, particularly the amount, the method of calculation, and any combination with contractual penalties or other sanctions. If the interest rate is not specified in the contract, the statutory rate derived from the Czech National Bank’s repo rate plus 8 percentage points applies; for defaults occurring in the second half of 2026, this amounts to 11.75% per annum. Contractual interest may be higher, but its reasonableness is not unlimited, and extreme rates may run up against statutory and constitutional limits. The calculation of default interest depends on the amount of the debt, the interest rate, and the duration of the delay. If the amount owed increases rapidly due to interest or other penalties, it is advisable to review not only the rate itself but also the entire content of the contract and the method by which the creditor calculated its claim.