Statutory Interest Rates Explained — How Interest Is Calculated When Money Is Owed

What Is Statutory Interest?

When money is lent or owed and the parties did not agree on an interest rate, the law supplies a default rate. This is called statutory interest (also called legal interest).

Statutory interest in the US falls into several categories depending on the context:

Category	Typical rate	When it applies
Prejudgment interest	Varies by state (often prime rate or ~5–9%)	On debts owed before a judgment is entered
Post-judgment interest	Federal: 28 USC §1961 rate (Treasury bill rate)	After a federal court judgment; states set their own rates
Penalty / late interest	Often 10–12%	Set by state statute as an incentive to pay promptly

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1. Prejudgment Interest

Prejudgment interest compensates a creditor for the time value of money lost while waiting for payment before a lawsuit is resolved.

How It Works

Rules vary significantly by state:

• California: 7% per year on contract debts (Civil Code § 3289); 10% per year when a fixed sum is owed.
• New York: 9% per year (CPLR § 5004) for most civil claims.
• Texas: Rate tied to the prime rate (Finance Code § 304.003).
• Federal courts: Generally apply the law of the state where the court sits for prejudgment interest.

Example Calculation

You lent $10,000 and agreed it would be repaid in two years. It was not. You are in California and the contract was silent on interest. Interest =$10,000 × 7% × 2 years = $1,400

Note: Simple interest (not compound) is the default unless the contract specifies otherwise.

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2. Post-Judgment Interest

Post-judgment interest accrues from the date a court enters judgment until the debt is actually paid.

Federal Rate (28 USC § 1961)

For federal court judgments, the rate equals the weekly average 1-year Treasury constant maturity yield for the week preceding the judgment. This rate is published weekly by the Federal Reserve and changes over time.

State Court Rates

Each state sets its own post-judgment rate:

• New York: 9% per year
• California: 10% per year
• Florida: Set annually by the Chief Financial Officer (typically follows market rates)
• Illinois: 9% per year

Because judgment debtors can invest money or avoid paying for years during appeals, post-judgment interest ensures the creditor is compensated for delay.

Example Calculation

A $100,000 judgment was entered on January 1. California's 10Interest =$100,000 × 10% × (180/365) = approximately $4,932

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3. Penalty Interest / Late Payment Statutes

Beyond standard prejudgment and post-judgment rates, many statutes impose higher penalty rates to discourage delay:

• Prompt Payment Acts (federal and state): Require federal contractors to be paid within 30 days; late payments accrue interest at the Treasury rate plus 2%.
• State prompt payment laws: Many states have analogous rules for construction contracts, medical billing, and insurance claims.
• Credit card statutory rate: Not technically “legal interest” — governed by contract — but federal law allows it to be disclosed in the same context.

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When Does Interest Start Running?

The start date (accrual date) is frequently the source of disputes.

Prejudgment interest accrual

• Fixed due date: Interest begins the day after the due date.
• “On demand” debts: Interest begins the day after a formal demand for payment is made.
• Tort damages: Interest typically begins on the date the injury or harm occurred.

Interest Calculation Formula

Interest = Principal × Annual Rate × (Days / 365)

Example:
Principal:   $5,000
Rate:        7% per year
Period:      January 1 – December 31 (365 days)
Interest = $5,000 × 0.07 × 365/365 = $350

Practical note: Many states follow the rule that the first day of the period is excluded from the count (i.e., if payment was due January 1, interest runs from January 2). Confirm the rule in your state.

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Frequently Asked Questions

Q. I lent money to a friend with no written interest agreement. Can I charge interest?

A. Yes — you can claim the applicable state prejudgment rate. However, you need a clear due date in your loan agreement (oral or written) to establish when interest begins to run.

Q. Does a judgment automatically earn interest?

A. Yes. Once a court enters a judgment, post-judgment interest accrues automatically at the statutory rate without any additional request.

Q. Can I compound interest?

A. No — US law generally presumes simple interest unless the contract expressly provides for compounding. Courts will not impose compound interest without a clear contractual basis.

Q. Is there a cap on agreed interest rates?

A. Yes. Every state has usury laws capping the maximum rate parties can contract for. Common caps range from 10% to 25% per year depending on the state and the type of loan. Interest charged above the usury limit may be void, and in some states the lender may forfeit all interest.

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Default Interest vs. Statutory Interest

	Default interest (contractual)	Statutory interest
Source	Agreed by the parties	Set by law
Rate	Whatever was agreed (subject to usury caps)	Fixed percentage set by statute
Starts	When the payment becomes overdue	Upon demand or court filing
Priority	Contractual rate governs if one exists	Applies only when no rate was agreed

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Calculate It Yourself

Statutory interest calculations can get complex once you factor in the accrual date, applicable rate, days in the year, and whether prejudgment or post-judgment rules apply. A dedicated calculator eliminates arithmetic errors.

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