Is It Legal To Charge Interest On Overdue Accounts In Australia?

This is a question that many Australian business owners struggle with and one we hear often. Most understand the practical value of charging interest on overdue accounts, but they worry about the legality of applying additional charges. Not to mention the ethical nature of putting forward late payment fees and whether it carries risk of consuming more time than it’s worth or damaging a relationship to the point you may lose out on future income.

In short the answer is yes, charging interest on overdue accounts is legal in Australia. 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. Read on to understand more about your obligations and requirements in this space.

What are the requirements for charging 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 in Australia. 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. Put it in terms and conditions before the fact: 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, it will appear to be an undisclosed or randomly assigned amount.
2. Be fair and reasonable: 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. Consider the loss and time demand on your part in a fair light, more on this in a moment.
3. Clear payment due dates: 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 will automatically be considered legal. If you try to charge fees or interest rates that are too high, the client will be more likely to avoid paying if they’re already overdue. If at that point 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 businesses 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.

It may also helpful to mention in your communications, either proactively as part of point 1 or during recovery, that this amount is systematised into all your invoices or contracts, and covers your own systems and charges required to recover outstanding fees in the first place. That is to say,  it’s going to cost you some time and money to recover outstanding fees and dig into your own savings to pay the costs of goods or services rendered, and simply mentioning this may go a ways to help them understand that it’s not just an annoying, money-grabbing activity.

Should you charge outstanding debt interest on overdue accounts?

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.

As we experience every day in this profession, the field of recovering outstanding debt is a sensitive one that requires careful consideration of all parties and monies involved. It’s about people and fairness, and is difficult to surmise and reach lasting results using numbers only. If you’re struggling with organising your outstanding debts, give us a call and we’ll be happy to share our expertise!

View business guidelines here for more insights on the Australian Consumer & Competition Commission’s (ACCC) input how to act in accordance to guidelines on consumer fairness and payment.