Quote Originally Posted by Rapid Robert View Post
"additional interest"? Not really. If my mortgage is at a 5% APR, and the late fee calculates to a 15-20% annual equivalent rate or higher, then that's not really "additional interest" -- it's a fee, plain and simple. Or to put it another way, if the late fee is a fixed amount, not based on the size of the late payment, then clearly it is not simply a finance charge (interest). Also, unlike IRS late payment interest which is calculated day by day to the exact date payment is received, I imagine most late payment fees are a flat amount, whether you are 3 days or 30 days late. So again, not interest under any reasonable definition.

As I implied above, the most likely explanation is that it benefits the banks to report the late payment fee income as "interest received" rather than ordinary income. Only the most naive would think it has anything to do with helping the taxpayer.
The "interest" vs "late fee" discussion is a distinction without a difference. They carry a different name, but late payment fees and interest are essentially the same thing - nothing more than a charge for the use of someone else's money. The financial services industry has invented these buckets for classification purposes, and also to hide the fact the "late fees" amount to a form of usury. As accountants and tax preparers, we must take notice of the bucket concept of course, but if we take the time to step into financial mode, it's possible to lay aside these artificial constructs and think analytically.