Can a Debt Collection Agency Charge Interest on Your Debt? The Truth Revealed
Ever get a call from a debt collector – and the amount they’re asking for seems way higher than what you originally owed? Chances are, they’ve tacked on some extra interest and fees. But can they actually do that? Let‘s dig in.
The Lowdown on Interest Charges from Debt Collectors
The short answer is – it depends. Debt collectors can potentially charge interest on your debt, but only if it was allowed under the original agreement with the creditor. They can’t just make up extra fees and interest as they go.Here’s the deal: when you take out a loan, get a credit card, or sign up for some other type of credit, you’re entering into a legal agreement. That agreement lays out all the rules – including whether the creditor can charge interest if you miss payments, and how much.So if your original contract said the interest rate could go up to 25% if you defaulted, then a debt collector is allowed to charge that 25% interest on your unpaid balance. But they can‘t just decide to slap on a 50% interest rate out of nowhere.The Federal Trade Commission has some simple guidance on this:
-“A debt collector may not collect any amount (including interest, fees, charges or expenses incidental to the principal obligation) unless it is expressly authorized by the agreement creating the debt or permitted by law.”
In plain English – they can only charge what was allowed in your initial contract, or what’s permitted by state law where you live. No making up new charges just because they feel like it.
But What If the Debt Collector Bought Your Debt?
Okay, but what if the debt collector isn‘t the original creditor – they bought your unpaid debt from the original company? Like, your credit card company sold your debt to a third-party debt buyer. Can that new company charge different interest and fees than what was in your original card agreement?The short answer is no, they can’t. When a debt buyer purchases your debt, they’re bound by the same rules and agreements that the original creditor had to follow.As this Reddit thread discusses, the debt buyer essentially steps into the shoes of the original creditor. So if your credit card agreement capped interest at 25%, the debt buyer can’t turn around and try to charge 30% interest.The Federal Trade Commission is clear on this:“A debt collector may not collect any interest or fee not authorized by the agreement or by law. The interest rate or fees charged on your debt may be increased if your original loan or credit agreement permits it and no law prohibits the increase, or if state law expressly permits the interest or fee.”So in summary – debt buyers have to play by the same rules as the original creditors when it comes to allowable interest and fees. They don’t get a free pass just because they purchased the debt.
Exceptions for Certain Types of Debt?
Now, there are a few exceptions to this whole “interest has to be allowed in the original agreement” rule. Certain types of debt may have different interest rules.For example, medical debt often doesn’t accrue interest at all unless you‘ve signed up for a specific medical credit card or loan program. So if a debt collector is trying to charge interest on a plain old unpaid hospital bill, that could be a red flag.As the SoloSuit debt guidance explains:“Medical bills rarely charge interest, so if a debt collector claims you owe a medical debt plus interest, they’re probably lying…Typically, hospitals cannot charge interest unless you sign up for an agreement that includes it.”The same generally goes for things like utility bills, gym membership fees, and other service-based debts. Interest usually isn’t a factor unless you’ve explicitly agreed to it.On the flip side, debts like student loans almost always accrue interest – often at a rate set by the government, not by a private contract. So for student loan debt, it’s more expected that interest charges would apply even after the debt goes to collections.Bottom line – the type of debt can make a difference in whether interest charges are legit. It’s always worth double-checking the original agreement or account terms.
How to Spot Shady Interest Charges
Okay, so debt collectors are allowed to charge interest and fees in certain cases. But how can you spot if they’re trying to pull a fast one and overcharge you?First thing‘s first – get your hands on a copy of the original credit agreement, loan contract, or account terms that spell out the allowable interest rate and fees. You’re entitled to receive this documentation from the debt collector if you ask.The Consumer Financial Protection Bureau has sample letters you can send to request info on why your interest rate was increased. Definitely take advantage of this.Once you have the paperwork, do a careful comparison between:
-- The interest rate and fees listed in your original agreement
- The interest rate and fees the debt collector is trying to charge you
If the numbers don’t match up, that’s a huge red flag. The debt collector may be violating the Fair Debt Collection Practices Act by trying to collect more than they’re allowed.You can find some good examples and guidance on this in articles from consumer law firms. Pay special attention to any mentions of specific court cases or legal precedents cited.It’s also a good idea to look up the interest rate limits and debt collection laws for your specific state, since some states have extra consumer protection rules on top of the federal laws. Your state’s consumer protection office website should have these resources.If the debt collector is clearly charging higher interest than your original agreement allows, you may have a legal case against them for violating debt collection laws. But make sure to consult an attorney, because the rules can get complicated.
Strategies for Dealing with Excessive Interest Charges
So what can you actually do if a debt collector is trying to charge excessive, illegal interest on your debt? Here are some tips:
- First, send them a debt validation letter contesting the interest charges and asking for proof of their calculations. The CFPB has sample debt validation letter templates you can use.
- Check if the debt is too old for the collector to legally pursue (look up statute of limitations for your state). If so, you can use that as a defense against any interest charges.
- Look into the possibility of re-aging or reviving the debt. Some actions on your part could inadvertently restart the clock on interest accrual.
- Consult a consumer law attorney, especially if the debt is for a large amount. They can evaluate if you have a case against the collector for violating debt collection laws.
- As a last resort, you may be able to settle the debt for less than what the collector is demanding by negotiating a lump sum payoff. Get any settlement agreement in writing first.
The key is acting quickly and building a documented paper trail contesting the interest charges. The longer you wait, the harder it can be to fight excessive fees.And remember – while dealing with debt collectors is never fun, you do have rights as a consumer. Don’t let them bully you into paying more than you legitimately owe.