Interest
How interest is calculated on your credit contract.
There is no limit to the interest rate that creditors can charge. But the interest mustn’t be oppressive. The way that the creditor calculates interest must be explained in your contract.
Interest can’t be charged in advance. This means that you only have to pay interest as it builds up over time. Interest must be calculated from the unpaid balance. This can be done daily, weekly or monthly.
For example: Liz borrowed $1,000 and agreed to make monthly repayments. The annual interest rate was 16%. Her interest was calculated using the monthly interest rate and the average unpaid monthly balance:
Average unpaid daily balance = $1000
Monthly interest rate 16% ÷ 12 = 1.333%
Interest charges 1.33% x 1000 = $13.33
This meant the interest owed after the first month of January was $13.33.
Can they charge me extra interest if I fall behind in my payments?
Yes, this is called default interest. Your credit contract may give the creditor the right to charge a higher interest rate on the amount that you haven’t paid. Default interest charges must not be harsh or oppressive and they must be explained in your contract.
The creditor might charge default interest on the entire unpaid balance of a loan rather than the amount in default but if a creditor does this, you can challenge it on the grounds that it is oppressive, or is an unenforceable penalty. If this happens get some advice from a community law centre.
