Short answer
A late fee that a creditor keeps for a debt paid late is riba, because it is extra money for extra time. Islamic contracts instead ask a late payer to give a set amount to charity. If a late fee has already been charged to you, you will usually have to pay it; pay on time from then on and ask Allah's forgiveness.
A penalty the creditor keeps for delay in paying a debt is riba and haram. A borrower's binding pledge to pay a set amount to charity if he pays late, which never benefits the creditor, has been adopted by contemporary Hanafi scholars. Delaying a debt you are able to pay is itself a sin.
The four schools agree on this.
Explanation
Once money is owed, whether from a loan, a purchase on credit or rent that has fallen due, any increase for more time is the riba the Arabs dealt in before Islam: pay now, or owe more. The Prophet ﷺ abolished that riba in his farewell sermon. A late fee that rises the longer you wait is plainly this. A fixed late fee that goes to the creditor as income is also an increase on a debt.
Islamic finance handles late payment in two ways:
- A charity pledge. The customer promises in the contract to give a set amount to charity for each late payment. The provider collects it and passes it on, and it does not count as the provider's income.
- Actual costs. Some standards allow the creditor to recover the real costs of collecting the debt, not a profit.
The debtor has duties too. Delay by someone able to pay is injustice, so late fees are not a reason to pay late. The Quran asks creditors to give real hardship time (2:280). Some cases people ask about:
- A rent late fee: overdue rent is a debt, so the same rule applies to the landlord who charges it.
- A parking ticket or court fine is a legal penalty for breaking a rule, not an increase on a loan; pay it.
- If you signed a contract with a late fee, the best protection is automatic payment so it never applies.
Contemporary scholars of the four schools agree that a late penalty kept by the creditor is riba; the charity pledge draws on a Maliki rule about binding promises to give.
The evidence
Quran, Surah Al-Baqara 2:280
وَإِن كَانَ ذُو عُسْرَةٍۢ فَنَظِرَةٌ إِلَىٰ مَيْسَرَةٍۢ ۚ وَأَن تَصَدَّقُوا۟ خَيْرٌۭ لَّكُمْ ۖ إِن كُنتُمْ تَعْلَمُونَ ﴿٢٨٠﴾
And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew.
The answer to a debtor in hardship is time, not an increase.
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
An increase charged on a debt for time is interest.
Sahih Muslim 1218
Sahih... وربا الجاهلية موضوع وأول ربا أضع ربانا ...
"The riba of the time of ignorance is abolished, and the first riba I abolish is our own."
Increasing a debt for delay was the riba Islam abolished.
Sahih al-Bukhari 2287
Sahih... مطل الغني ظلم ...
"Delay in paying by someone who is able to pay is injustice."
A debtor who can pay must not delay.
Where the ruling is recorded
- AAOIFI Shari'ah Standards, Standard on default in payment by a debtor. Forbids penalty income for the creditor and allows a charity undertaking.
- Mufti Taqi Usmani, An Introduction to Islamic Finance, Chapter on murabaha, section on penalty for late payment. Explains the charity pledge used in Islamic contracts.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.