As if being in debt wasn’t already bad enough, having interest thrown on top of it is like adding insult to injury.  

When dealing with debt collectors, many consumers are surprised to learn that the amount they owe may be increasing due to interest charges. This raises an important question: Can debt collectors legally charge interest on the debts they’re trying to collect? The answer is not always straightforward and depends on various factors.  

This article will explore the legalities surrounding interest charges by debt collectors, the circumstances under which they can add interest, and what you need to know to protect your rights as a consumer. 

Yes or no? 

The short answer is: Yes, in many cases, debt collectors can charge interest, but with important caveats and limitations…  

• Original contract terms: If the original agreement with the creditor allowed for interest charges, the debt collector may continue to charge interest at the agreed-upon rate. That said, the collector must adhere to the terms of the original contract. 

• State law compliance: Debt collectors must comply with state laws regarding interest rates and charges. Some states have maximum interest rates that can be charged on debts (usury laws). 

• Disclosure requirements: Under the Fair Debt Collection Practices Act (FDCPA), debt collectors must clearly disclose the amount of the debt, including any interest or fees. Additionally, they cannot misrepresent the amount owed. 

• Original creditor vs. debt buyer: Original creditors who collect their own debts are often not bound by the FDCPA and may have more leeway in charging interest, while third-party debt collectors and debt buyers are subject to stricter federal regulations. 

• Court judgments: If a debt collector obtains a court judgment against you, the court may allow for post-judgment interest. This interest rate is often set by state law and may differ from the original contract rate. 

Scenarios where interest may be charged

These are the most common scenarios where you can expect to be charged interest… 

• Credit card debt: Most credit card agreements allow for continued interest charges on unpaid balances. Debt collectors may continue charging this interest if they are collecting on behalf of the original creditor. 

• Personal loans: If the loan agreement included provisions for interest on late or unpaid balances, collectors may continue charging this interest. 

• Medical debt: Typically does not accrue interest initially, but may do so if a payment plan is established or if the debt goes to collections. 

• Student loans: Federal student loans continue to accrue interest even in collections. Private student loans may accrue interest based on the loan agreement. 

Limitations on interest charges 

While debt collectors can charge interest in many cases, there are (thankfully) important limitations… 

• Cannot exceed original agreement: Collectors cannot charge higher interest rates than those specified in the original contract. 

• State usury laws: Must comply with state-specific caps on interest rates. 

• Proper notification: Collectors must inform you of any interest charges as part of the total amount owed. 

• No “interest on interest”: In most cases, collectors cannot charge interest on already accrued interest. 

• Statute of limitations: Once a debt is time-barred, collectors generally cannot continue adding interest. 

Your rights as a consumer 

Just because you owe money doesn’t mean you don’t have rights. Knowing them can have a huge impact on how you manage your financial situation, and allow you to take proactive steps to address any interest charges you may be facing… 

• Document everything: Keep detailed records of all communications with debt collectors. 

• Right to information: You have the right to request a detailed breakdown of your debt, including principal, interest, and fees. 

• Debt verification: You can request debt verification, which should include information about any interest charges. 

• Dispute inaccuracies: If you believe interest is being charged incorrectly, you have the right to dispute the debt. 

• Negotiate interest charges: In some cases, you may be able to negotiate with the collector to reduce or eliminate interest charges. 

• Seek legal advice: If you’re unsure about the legality of interest charges, consult with a consumer protection attorney.