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Are Late Fees and Penalties a Problem of Ribbis?

Rav Yosef Dovid Josilowsky, Dayan at the Bais HaVaad

Question: Many service agreements and contracts contain provisions, such as late fees and penalties. 

Can including these penalties in the contract lead to issues of ribbis

Answer:  It is common to have conditions, fees, and penalties in service agreements with terms that could be an issue of ribbis. Even if the two sides don’t intend for the penalties to ever go into effect, it might still be forbidden under the prohibition of facilitating a ribbis arrangement. For this reason, it is worthwhile to look over any contract for issues of ribbis before signing. 

Generally, late fees or penalties can be put into a contract in a permitted way by making them ribbis derech k’nas, interest in the form of a penalty. If the fees are not phrased as an extra payment, but rather as a penalty for not paying on time, it is permitted in a case where the ribbis is d’rabanan. In most service agreements, there is no loan and these agreements are similar to a sale of services or goods. Since ribbis d’ohraysa applies only in cases of transactions in the form of a loan, such contracts would only be ribbis d’rabanan, and there would be no problem if it is ribbis derech k’nas

While this is true of one-time fees for a late payment, if the fee is recurring – for example, if there is a new fee charged every 30 days that the payment is outstanding – it would look like the penalty is actually a payment for another 30-day time extension and not a k’nas. This could be a problem of ribbis that would require a proper heter iska.

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