What is the purpose of imposing late fees on overdue payments?

Imposing late fees on overdue payments serves the primary purpose of discouraging late payments. When borrowers understand that there are financial penalties associated with missed or late payments, they are more likely to prioritize making their payments on time. This mechanism helps ensure the lender receives payments as scheduled, which is crucial for maintaining the financial health of the lending institution.

Additionally, the structure of late fees can encourage borrowers to adhere to their repayment schedules, promoting responsible borrowing behavior. By knowing that a late fee will apply, borrowers may take proactive steps to avoid being in that situation, such as setting up reminders or automatic payments. As a result, late fees not only serve as a deterrent but also contribute to a more predictable cash flow for lenders, which can ultimately benefit all parties involved in the loan agreement.