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Is it legal to charge interest on overdue accounts in Australia?

This is a question that many Aussie business owners struggle with and a question we get often. They understand the practical value of charging interest on overdue accounts, but they worry about the legality of applying additional charges.

In short, the answer is yes, charging interest on overdue accounts is legal. However, this does not mean that everything is on the table once a customer or client goes overdue on an invoice. You do have to adhere to certain requirements and restrictions for your claims to overdue interest to be legal, and not doing so could land you in trouble.

What are the requirements for overdue interest?

If you want to charge late fees and interest on overdue accounts, you have to follow certain rules for it to be legal. Many small businesses make mistakes in the way that they apply overdue interest, and it only causes them to have more problems when they try to collect on debts. The following are a few of the points that you need to know about charging interest on overdue accounts:

  1. A provision for the overdue interest has to be in the Terms & Conditions that the client agreed to before goods or services were provided. If it isn’t in the contract, you can’t just tack on a charge after the fact.
  2. The charges have to be what is deemed “fair and reasonable”. If the rate of interest is too high, the client is going to refuse to pay, and the courts will not uphold your right to an unreasonable amount of interest.
  3. You have to make sure that the due date is clear to the client in the contract. Also, make sure that it is clear that interest will be charged starting with the day following the due date.

If you follow these rules, you should be within your legal right to charge a client for going past due on a payment. To recap, make sure that a provision for the overdue fees and interest is included in the terms of the contract, make sure the client is aware of the due date, and that charges will accrue if payment is not made on time. Finally, make any interest or charges reasonable.

 

What is a reasonable interest rate to charge?

Just because you have a provision for late fees and interest in your contract, that does not necessarily mean that the provision itself is legal. If you try to charge fees or interest rates that are too high, the client will balk at paying, and even if you take them to court, the court will find that you were trying to charge an unreasonable amount for overdue payment.

As a general rule of thumb, most business would cap the interest at 10% annually and break the interest down by a monthly charge. As an example, if you charge 10% interest rate on an account that was overdue on $1,000, the annual interest would be $100. You would then divide that by 12 to get a monthly overdue charge of $8.33. From the point that the account goes overdue, you would then charge them an additional $8.33 every month until the bill is paid in full.

 

Should you charge outstanding debt interest?

This is another good question we hear a lot. Charging interest can serve a practical purpose. When clients/customers know that there are additional charges attached to late payments, they are more likely to pay on time. On the other hand, this can be a bit of an antagonistic step, and it could escalate the situation in a way that might be counterproductive.

This might be a question that is better answered on a case-by-case basis. Should you stick rigidly to the letter of the contract and charge interest just because you have the right? As a courtesy, you could send a reminder on the first day the payment is past due. Inform the client that they are late on their payment, remind them that you could start charging them interest, but tell them you will give them another week before you start adding interest to the existing charges. This is a smart move from a customer relations standpoint, and the reminder might be all it takes to get the client to pay.

If you are going to start charging interest and late fees, you want to make sure to follow the rules. Trying to overcharge is only going to cause more problems than it solves, and you won’t be able to collect the high interest anyway. In addition to that, try to give people an opportunity to pay before you start adding the late fees. A friendly reminder could save you from a significant hassle, and it might be all you need to get the client to send payment.

 

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