Author(s): Mihajlo Cvetković
Subject(s): Law, Constitution, Jurisprudence, Micro-Economics, Civil Law
Published by: Правни факултет Универзитета у Нишу
Keywords: interest on overdue payments; calculation method; monetary obligations; anatocism ; compound interest; interest rate

Summary/Abstract: One of the most important legal consequences in case of late payment is the obligation to pay default interest (penalty interest). Default interest is the fee for using someone else’s money. The amount of interest depends on the time delay, interest rates and the calculation method. Although the method of calculation is a very important factor for interest, it is often neglected in the legal regulations and legal theory. At the beginning of this paper, the author points out to the general concept of interest, with a focus on the default (penalty) interest and its functions. Particular attention is paid to method of interest calculation for its impact on the overall amount of debt. Because of the complexity of the matter the author starts from the ground up: simple and compound interest computation. Simple interest is calculated only on the principal amount, or on that portion of the principal amount that remains unpaid. Compound interest is very similar to simple interest; however, with time, the difference becomes considerably larger. This difference occurs because unpaid interest is added to the balance due. Put another way, the borrower (debtor) is charged interest based on previous interest. In the second part of the paper, the author indicates shortcomings of Serbian Act on Default Interest Rate (2001). Due to those shortcomings, the default interest is calculated in a specific way that is shown and analyzed in the light of existing conditions on Serbian market. Since the current condition of the domestic legislation and legal practice is inadequate, the author points out to EU Directive 2000/35/EC on combating late payment in commercial transactions and notes the innovative solutions contained in the 2009 Proposal for a new Directive on combating late payment. At the end, the author concludes that national legislation needs to be updated. Conclusion contains several proposals how to do so. Proposals are related to: determination of interest rate; transfer to “simple” interest; frequency of interest rate modification; special rules for certain categories of debtors.

  • Issue Year: LVI/2010
  • Issue No: 56
  • Page Range: 231-252
  • Page Count: 22
  • Language: Serbian