In North Carolina the legal rate of interest on a judgment is 8% per year. Parties are also permitted to contract for a rate of interest in excess of the legal rate. At the time of this writing, the effective prime interest rate is 3.25%. As a result of this disparity between the legal interest rate in North Carolina (which was established when prime interest rates were in excess of 10%) and the current prevailing interest rates, there are currently calls for the legislature to revise the legal interest rate in North Carolina. To be clear, this has not happened.

Since the legal rate of interest in North Carolina remains at 8% per year, this is something which must be considered during litigation. On a breach of contract claim, such as a breach of a promissory note, or breach of an obligation to pay on an account, interest accrues on the debt from the date of breach.

Consider a situation wherein a debtor had a contractual obligation to repay $100,000.00 on or before May 1, 2020. If the debtor fails to repay the debt by that date, and the legal rate of interest controls, then $8,000.00 per year accrues in interest on this debt. If a lawsuit is filed in May of 2021 to collect the debt, and that lawsuit is subsequently litigated for another year, then additional interest will accrue during the pendency of litigation. If a judgment is obtained on May 1, 2022 a total of $16,640.00 in interest would be due and owing on a $100,000.00 debt.

If you are being sued for an unpaid balance, you should consider the impact of accruing interest on your total balance. In some instances, the accruing interest could exceed any offset you may be entitled to should you choose to assert counterclaims or other defenses

Often debtors we speak with take it as a given that they are not required to pay accrued interest if they settle a debt. Such a belief is unwarranted. It is prudent for a creditor, or their attorney, to start a conversation with a debtor, or debtors attorney, with the total balance due inclusive of interest and attorney’s fees as of the date the settlement discussion is taking place. A creditor may make a business decision to waive a portion of interest and legal fees to be paid on an outstanding balance. However, during negotiations, a creditor should always include interest and fees which are, or will be, included in a judgment in the starting number for negotiation.

In today’s world of generally low interest rates, litigants should not overlook the fact that North Carolina’s legal rate of interest is substantially higher than the prime rate. Additionally, litigants should strategically consider the effect of interest which is accruing as they frame settlement negotiations. We would be glad to review your legal situation to determine how accruing interest might shape the outcome of your matter and to help you develop a strategy to resolve a situation taking interest into consideration.