A penalty fee is an additional interest rate that an investor earns in case a loan is late for more than its specified grace period.
Penalty fees start to accumulate as soon as the loan surpasses the grace period. However, the accumulated penalty fees are only received when the asset is fully repaid by the borrower.
Please note: Investors do not receive penalty fees if the asset was repaid during the grace period or if the asset was bought back by the loan originator.