diff --git a/contracts/loan_manager/src/lib.rs b/contracts/loan_manager/src/lib.rs
index c7f6d05d..776db9a8 100644
--- a/contracts/loan_manager/src/lib.rs
+++ b/contracts/loan_manager/src/lib.rs
@@ -425,14 +425,15 @@ impl LoanManager {
         }
 
         let remaining_principal = Self::remaining_principal(loan);
-        let remaining_debt = remaining_principal
-            .checked_add(loan.accrued_interest)
-            .expect("debt overflow");
-        if remaining_debt <= 0 {
+        if remaining_principal <= 0 {
             loan.last_late_fee_ledger = current_ledger;
             return 0;
         }
 
+        let remaining_debt = remaining_principal
+            .checked_add(loan.accrued_interest)
+            .expect("debt overflow");
+
         let overdue_ledgers = current_ledger - late_fee_start;
         let incremental_fee = remaining_debt
             .checked_mul(Self::late_fee_rate_bps(env) as i128)
diff --git a/contracts/loan_manager/src/test.rs b/contracts/loan_manager/src/test.rs
index ce95dd25..96461dfc 100644
--- a/contracts/loan_manager/src/test.rs
+++ b/contracts/loan_manager/src/test.rs
@@ -962,6 +962,63 @@ fn test_late_fee_is_capped_at_quarter_principal() {
     assert_eq!(loan.accrued_late_fee, 250);
 }
 
+#[test]
+fn test_late_fee_does_not_accrue_after_principal_fully_repaid() {
+    let env = Env::default();
+    env.mock_all_auths_allowing_non_root_auth();
+
+    let (manager, nft_client, pool_client, token_id, _token_admin) = setup_test(&env);
+    let borrower = Address::generate(&env);
+
+    let history_hash = soroban_sdk::BytesN::from_array(&env, &[0u8; 32]);
+    nft_client.mint(&borrower, &600, &history_hash, &None);
+
+    let stellar_token = StellarAssetClient::new(&env, &token_id);
+    stellar_token.mint(&pool_client, &10_000);
+
+    manager.set_late_fee_rate(&500);
+    manager.set_grace_period_ledgers(&0);
+    env.ledger().set_sequence_number(1);
+
+    let loan_id = manager.request_loan(&borrower, &1_000);
+    manager.approve_loan(&loan_id);
+
+    let due_date = manager.get_loan(&loan_id).due_date;
+
+    env.as_contract(&manager.address, || {
+        let loan_key = DataKey::Loan(loan_id);
+        let mut loan: Loan = env.storage().persistent().get(&loan_key).unwrap();
+        loan.principal_paid = loan.amount;
+        loan.interest_paid = 0;
+        loan.accrued_interest = 75;
+        loan.accrued_late_fee = 10;
+        loan.last_late_fee_ledger = loan.due_date;
+        env.storage().persistent().set(&loan_key, &loan);
+    });
+
+    env.ledger().set_sequence_number(due_date + 8_640);
+
+    let late_fee_delta = env.as_contract(&manager.address, || {
+        let loan_key = DataKey::Loan(loan_id);
+        let mut loan: Loan = env.storage().persistent().get(&loan_key).unwrap();
+        let accrued_before = loan.accrued_late_fee;
+
+        let delta = LoanManager::accrue_late_fee(&env, &mut loan);
+
+        assert_eq!(delta, 0);
+        assert_eq!(loan.accrued_late_fee, accrued_before);
+
+        env.storage().persistent().set(&loan_key, &loan);
+        delta
+    });
+
+    assert_eq!(late_fee_delta, 0);
+    let loan_after = manager.get_loan(&loan_id);
+    assert_eq!(loan_after.principal_paid, loan_after.amount);
+    assert_eq!(loan_after.accrued_interest, 75);
+    assert_eq!(loan_after.accrued_late_fee, 10);
+}
+
 #[test]
 fn test_deposit_collateral_and_auto_release_on_full_repayment() {
     let env = Env::default();