Default Rate

An increased interest rate imposed by the lender’s loan documents triggered by the borrower’s default under the loan documents.

Under Section 506(b), an oversecured lender is entitled to interest on its claim, together with fees, costs, or charges under its loan documents. But the Section explicitly states that fees, costs and charges must be “reasonable,” while imposing no such limitation on the oversecured creditor’s right to interest. This has led some courts and scholars to debate whether the creditor is entitled to interest at its contract rate—even if it entails the allowance of default interest—or at some other, unspecified rate.

Bankruptcy Code § 506(b). See also Interest, Oversecured Creditor, Secured Claim.

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