Section 47 allows payments to be credited on the day they were received rather than the day they were processed, eg, if a debtor makes a payment on a non-business day and the payment is processed on a later business day, it may be credited to the debtor’s account on the day it was made.

Exception

This ordinary rule is subject to the following exception.

If a credit contract specifies a payment schedule, payments may be credited according to the schedule, rather than as soon as is practicable. It is only applicable to instalment credit contracts.

A payment schedule is not defined in the Act but means a plan for the receiving and crediting of payments. This involves specifying the timing and amount of each payment, such as its due date and specifying that payments will be credited according to the schedule. As a result, you can credit the payments on the date specified in the schedule rather than when they were received.

This will allow you to estimate the total interest charge on a contract with some certainty.

Examples

A contract provides that payments are due and will be credited on the 20th of each month. If a debtor makes a payment on the 15th, you may credit the payment on the 20th.
A contract provides that payments of $90 are due at the end of each fortnight. A debtor makes a payment of $95. The debtor may credit $90 when it is due and $5 towards the following fortnight’s payment.

Part prepayments

If a debtor offers a part prepayment you must receive and credit it as soon as practicable, unless the credit contract specifies otherwise.

You can refuse to receive part prepayments if this is specified in the contract. If you refuse the payment, it must be returned or refunded to the debtor. If the contract specifies a payment schedule you may credit the part prepayment in accordance with the schedule, provided that this is authorised in the contract.

You may charge a fee for part prepayment, based on a reasonable estimate of your loss resulting from the payment.

Full prepayment

“Full prepayment” is payment of the unpaid balance in full before it is due under the contract. This is often referred to as “early settlement”.

Do I have to accept a full prepayment from a debtor?

Yes, the debtor has a right to make full prepayment any time. You cannot remove that right by contract.

What must the debtor pay to make full prepayment?

The debtor must pay:

the unpaid balance as calculated at the time of the full prepayment. In calculating this, you must make sure you only include interest charges that have accrued to the date of full prepayment. You must also not debit any fees that would otherwise be payable after the full prepayment, eg, you cannot “bring forward” any monthly account keeping fees
any fees that cover your administrative costs. These credit fees must be authorised by the credit contract and disclosed in the initial disclosure statement
a fee or charge that does not exceed a reasonable estimate of your loss arising from the full prepayment. This must be authorised by the contract and disclosed in the initial disclosure statement.

You must also provide a proportionate rebate of any consumer credit insurance premium financed under the credit contract. This is discussed in Credit-related insurance.

What is meant by a fee or charge that does not exceed a reasonable estimate of my loss?

“Loss” in this context is based on the principles of contractual damages. It includes the gains you would have made if the contract had run its course and the debtor had not made full prepayment.

Calculating your loss involves comparing the return that you would have made on the original contract with the return that you will make when the prepaid amount is re-advanced to another debtor.

A fee that covers a reasonable estimate of your loss is a fee that compensates you for this foregone return.

The principles of contractual damages provide you with a duty to mitigate the loss. This means you must make reasonable efforts to re-advance the amount prepaid.

Calculate reasonable estimate of my loss

You may use the formula specified in regulations made under Section 54 (Creditor’s loss arising from full prepayment) of the Act. This provides a “safe harbour” for creditors. If you apply the formula correctly, you can be assured that the amount calculated represents a reasonable estimate of your loss.

You may use any other formula provided that its application does not produce a sum that is greater than a reasonable estimate of your loss.

How does the formula work?

The formula is based on the positive difference between the present value of remaining payments due on the loan, and the present value of the payments that would be received (if the amount paid early was re-lent under a hypothetical replacement contract for the remaining term at your prevailing interest rate).

The interest rate to be used for the replacement contract is the prevailing rate at which you would make an advance for the outstanding amount for a period equal to the remaining term (or the closest term you offer) of the original contract.

Obviously, you will have only suffered a loss if your prevailing interest rate has dropped since you entered into the original contract.

Note: This formula is fully set out in regulations - see the CCCFA Regulations page.

Will the formula apply in all cases?

The formula has been designed for fixed instalment contracts having regular, equal payments. The formula will not apply to contracts that have atypical features, eg, unequal sized payments. Nevertheless, the principles underlying the formula can be adapted for other circumstances.

Some other points to note on calculating loss

The formula assumes a fixed interest rate on the credit contract. If the contract has a variable interest rate, the rate applying to the original contract at the time of the full prepayment will be your prevailing rate so no issue of “loss” arises.

Similarly, you will not suffer a loss with revolving credit contracts, which are designed to be repaid at any time.

It is assumed you are able to re-advance the credit on the day it is prepaid. It would not be appropriate for you to include in the loss calculation any assumption that it takes longer than this. Firstly, as mentioned above, you must mitigate your loss by making reasonable efforts to re-advance the money as soon as it is prepaid. Secondly, at the time of the prepayment it is not known how long it will take to re-advance the money.

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