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1.5% a Month Is How Much a Year? Late Fee Interest Math, Worked Through

1.5% a month is 18% a year if it does not compound, and about 19.56% if it does. But on an overdue invoice the bigger difference is when the fee is charged: a monthly fee added on day one collects more early than 18% a year charged by the day. Here is the arithmetic, worked through.

Connery Davoodian · Founder, Fynl · 2026-11-09

WHAT THIS ADDSRate converters stop at 18% versus 19.56%. This page also shows the effect of timing, a monthly fee added at the start of each period against interest charged by the day, using the same $1,000 invoice at 30 and 45 days, because that is where a late fee clause and the bill a client actually receives part company.

Compare rates in the calculator Download the late fee rate conversion table (PDF)

The short answer

1.5% a month is 18% a year if each month's fee is worked out on the original amount (simple), and about 19.56% a year if each fee is worked out on the balance including earlier fees (compounded monthly). The difference is the interest on the interest.

That conversion matters most when you compare your terms with a legal limit, because limits are usually written as a yearly rate. A clause that sounds modest per month can look different once it is multiplied by twelve. If the place you or your client are in caps interest at, say, 12% a year, a 1.5% monthly fee is well above that number, and whether the cap applies to your fee is a question to check, not assume. Cornell's LII notes that interest limits differ from one US state to another.

The conversion, worked through

Simple: 1.5% × 12 = 18%. The same multiplication gives 12% for 1% a month and 24% for 2% a month.

Compounded: (1 + 0.015)12 − 1 = 1.1956 − 1 = 0.1956, so about 19.56%. For 1% a month it is about 12.68%, and for 2% about 26.82%. If you want to see compounding play out over longer periods, the SEC's compound interest calculator on Investor.gov shows it year by year.

Daily: 18% ÷ 365 ≈ 0.0493% a day. On $1,000 that is about 49 cents a day. The UK government's late payment guidance uses the same method in its own example: a yearly amount divided by 365 to get the daily interest, then multiplied by the days late.

Monthly late fee rates as yearly rates, simple and compounded.

Timing matters more than the headline rate

Here is the part rate converters leave out. A "1.5% a month" late fee is usually added at the start of each 30-day period, while "18% a year" is charged day by day. On the same $1,000 invoice, with no grace period, the invoice late fee calculator gives:

30 days late: $15.00 as a monthly fee, $14.79 as 18% a year by the day. Almost the same.
45 days late: $30.00 as a monthly fee, because the second fee was added on day 31, against $22.19 by the day. A third more.
45 days late, compounding: $15.00 then 1.5% of $1,015, which is $15.23, for $30.23.

Neither method is wrong. A monthly fee is simpler for a client to understand and check; daily interest is fairer to the day. What matters is that your terms say which one you use, and whether it compounds. Open the calculator with the 1.5% example and switch to Yearly interest to compare.

Going the other way, and why APR is a different number

To turn a yearly rate into a monthly one, divide by 12: 18% a year is 1.5% a month, 12% a year is 1% a month, 10% a year is about 0.83% a month. If a contract or a legal limit gives you a yearly figure, this is the quickest way to see what it allows as a monthly fee.

You may also see the term APR. On loans and credit cards, an annual percentage rate is a broader measure of the cost of borrowing than the interest rate alone, because it can include fees. The Consumer Financial Protection Bureau explains the difference for mortgages in its explainer on interest rate versus APR. A late fee on a business invoice is not a loan, so avoid calling your rate an APR unless you are sure the term fits; "a yearly rate of 18%, charged by the day" is clearer anyway.

Finally, round sensibly. Each fee is rounded to the cent, so a series of small compounded fees can differ by a cent or two from the formula. That is normal; just make sure your invoice shows each fee as its own line so the client can follow it.

How to check any rate, step by step

1. Multiply by 12 for the simple yearly rate

This is the number to compare with a limit or another business's terms.

2. Work out the compounded rate

Only needed if each fee is charged on a balance that includes earlier fees. In the calculator, that is the "charge each new percentage on the balance including earlier late fees" box.

3. Check the daily equivalent

Yearly rate ÷ 365. Useful if you are thinking of switching to daily interest.

4. Compare on a real invoice

Your typical invoice, at 30, 45 and 90 days late, as a monthly fee and as yearly interest. The reference sheet with this post has the $1,000 figures already worked out.

5. Write the method into your terms

"1.5% of the unpaid balance, added every 30 days, not compounded" leaves nothing to argue about. Our post on late fee wording for invoices has seven clauses to start from, and the one on how much to charge covers picking the rate.

If you invoice through Fynl, the automatic late fee in Invoice settings works as a monthly-style fee: a percentage of the overdue balance or a flat amount, added after the days you choose and repeated on your schedule, with an optional cap. It does not charge daily interest, so if your terms are a yearly rate, use the calculator for the figure.

The calculator is one of our free business tools; nothing you enter is sent anywhere.

This is general information, not legal advice. Late-fee and interest rules vary by state and country, and by whether your customer is a business or a consumer. Check the rules where you and your client are, or ask a lawyer, before you set a rate.

DO THISConvert any monthly rate to a yearly one before comparing it with a legal limit or a competitor's terms, decide whether your fee compounds and say so in writing, and check the actual charge at 30, 45 and 90 days in the calculator rather than trusting the headline rate.

KEEP ITA reference sheet: monthly late fee rates converted to simple and compounded yearly rates, daily rates and the charge on $1,000 at 30, 60 and 90 days. Download the late fee rate conversion table — free PDF, no sign-up.

Questions people also ask

Is 1.5% a month the same as 18% a year?

It is 18% a year if the fee is always worked out on the original amount. If each month's fee includes earlier fees, it compounds to about 19.56% a year.

How do I convert a monthly rate to a yearly rate?

Multiply by 12 for the simple rate. For a compounded rate, calculate (1 + monthly rate) to the power of 12, minus 1.

Which charges more, 1.5% a month or 18% a year?

Over a full year they are the same if neither compounds. On a shorter delay a monthly fee added at the start of each period can charge more: on $1,000 paid 45 days late it is $30.00 against $22.19 by the day.

Is an 18% late fee legal?

It depends on where you and your client are and whether the client is a business or a consumer. Interest limits differ between US states and between countries. Check the rules that apply or ask a lawyer.

Sources

Run your own invoice through both

Switch between a monthly percentage and yearly interest by the day, tick compounding on or off, and see the difference to the cent.

Open the invoice late fee calculator More free tool guides