When a borrower makes a payment under a consumer credit contract, the lender must apply the payment to the borrower’s account as soon as practicable after receiving it, unless the contract sets out a schedule for payments.
This means a borrower isn’t incorrectly charged interest or fees for late payments and lenders can still process payments in the way that best suits their business.
What does “as soon as practicable” mean?
“As soon as practicable” means as soon as the payment is available to the lender to reinvest under normal business conditions. In other words, when the lender can use the money elsewhere such as lending it to another borrower, paying business bills, or staff wages.
Does this mean a lender must apply a payment to a borrower’s account on the same day the borrower makes the payment?
No it doesn’t. It will depend on how a borrower makes a payment as this will affect when the money is available to the lender for reinvestment. A lender only has to apply a payment to a borrower’s account when the money is available for reinvestment.
What if a borrower pays by cash?
Lenders should apply cash payments to a borrower’s account on the same day the borrower makes the payment. This is because the lender could reinvest (re-lend or use) the money immediately.
But, this is only if the payment is made directly to the lender. If the payment is made to someone other than the lender (such as an agent) then it may take longer.
What if a borrower makes an electronic payment?
Lenders should apply electronic payments by EFTPOS to a borrower’s account on the same day the borrower makes the payment.
Other electronic payments such as direct debits, automatic payments and internet banking transfers may take longer to be processed by the borrower’s and lender’s banks. This means the payment may not be received and available for the lender to reinvest on the same day the borrower makes the payment. Lenders should apply these types of electronic payment to the borrower’s account when the money is available for the lender to reinvest elsewhere.
| Example | Sue logs on to internet banking to make a payment of $250 to her lender. As she is making the payment, a message comes up on the screen saying "Interbank transfers may take two working days to clear". The payment is due that day. Sue decides to go to her lender that afternoon and make the payment in cash rather than be charged default fees and default interest. |
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What if a borrower pays by cheque?
If a borrower makes a payment by cheque, there is likely to be a delay of several days before the money is available to the lender to reinvest – even if the lender banks it on the day they receive it. This is because of the time it takes for both the borrower’s and lender’s banks to clear and process a cheque.
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Example |
Andrew knows his loan repayment is due soon. He wants to pay by cheque so he phones his bank and finds out how long the cheque will take to clear. He is told 3-5 working days. He makes the cheque payment in person five working days before the payment is due. The cheque clears on the day the payment is due, and his lender applies the payment that day. |
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Does a lender always have to apply a payment as soon as practicable?
Yes, but with one exception. Often a lender will include a schedule of payments in a contract, which sets out when each payment must be made. Where there is a schedule of payments then a lender can apply a payment to a borrower’s account according to that schedule rather than as soon as practicable.
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Example |
Emily’s payments are due on the 20th of each month, but one month she makes a payment on the 14th. Emily’s lender can wait until the 20th to apply the payment to her account if the contract has clearly set out a schedule of payments. |
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Why does it matter when payments are applied to a borrower’s account?
If a borrower makes a late payment, a lender may charge default interest, default fees or take other enforcement action (depending on what the contract says).
Borrowers need to make sure that they get their payments to their lender on time. This means thinking about when a payment is due and the best way to pay to make sure the payment is received on time.
You can read more on our pages Fees under a consumer credit contract and Interest charges under a consumer credit contract.
What if a lender can’t apply a payment on the same day it is available for reinvestment?
Lenders can process payments whenever it best suits them. But lenders still have to apply the payment to the borrower’s account “as soon as practicable”. If a borrower makes a payment by the due date and the money is available for reinvestment this means:
- the lender should treat the payment as being made by its due date (in other words not treat it as a default, even if the lender can’t process it on the due date)
- the lender should apply (or backdate) the payment to the borrower’s account on or before the due date
- the borrower’s statements should show the payments as being made on the date the payment was available for reinvestment by the lender
- the lender should take this into account when calculating any unpaid daily balances. In other words, a lender should not use processing delays to charge more interest.
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Example |
Christine makes a $200 cash payment on its due date. In his records, the lender treats the payment as being made on its due date even though he could not process the payment until several days later. |
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Can a borrower make extra payments on a contract?
Yes. A lender must accept any extra payments a borrower makes under their contract unless the contract specifically allows the lender to decline the payment. This type of payment is known as “part prepayment”.
If a contract doesn’t allow part prepayment, but the borrower makes an extra payment, the lender can:
- accept the payment and apply it to the borrower’s account as soon as practicable (in other words, the lender can give up their right to reject the specific part payment)
- decline the payment and return it to the borrower as soon as practicable
or
- apply the payment to the borrower’s account according to a schedule of payments set out in the contract.
Can a lender charge fees for accepting extra payments on a contract?
Yes. A lender may charge a fee for part prepayment if the fee has been properly disclosed and it is reasonable.
If the lender does not know the exact amount of the fee at the time the contract is entered, then they must set out how they will calculate the fee.
You can read more on our pages on Initial disclosure under a consumer credit contract and Fees under a consumer credit contract.
Can a borrower pay off their debt early?
Yes. A borrower has the right to fully repay what they owe under a contract at any time. This is known as “full prepayment”. Lenders must accept full prepayment. If they don’t, they will breach the Credit Contracts and Consumer Finance Act (CCCF Act) and may also breach the Fair Trading Act.
What must a borrower pay to make full prepayment?
A borrower must pay the unpaid balance of their contract when they make full prepayment. The unpaid balance is the total amount they owe under the contract less what they have already repaid. That amount includes all the interest and fees that the lender was entitled to charge up to the date of prepayment, but not after that date. For example, a lender can’t charge monthly account fees for a full month if the borrower makes full prepayment part way through the month.
If the contract allows, and it has been disclosed properly, the lender may also charge the borrower:
- an administration fee to cover any costs to the lender from the full prepayment, for example the cost of processing the payment (either the actual cost or the average cost of a group of fully prepaid contracts)
and
- a “break fee” or “early repayment fee” that reasonably reflects the lender’s loss as a result of a borrower repaying their contract early (such as having to re-lend the money at a lower interest rate).
How can a lender calculate their loss on full prepayment?
The CCCF Act’s regulations set out a “safe harbour” formula for a lender to calculate a full prepayment charge. Provided lenders use this formula correctly, then any fee they charge as a result is treated as being a reasonable estimate of their loss.
Lenders may use other methods to work out their loss, as long as they can show that their method also produces a reasonable estimate of what they have lost from the borrower repaying their loan early.
A lender must detail how they intend to calculate any loss on full prepayment in the initial disclosure statement. This may be a formula or a description of how the lender will work out the full prepayment amount.
If the contract lets the lender vary their fees, then the lender may change the way they work out their early repayment fee. If they do this they must advise the borrower within five days of the change taking effect.
What if a borrower has consumer credit insurance and pays off their debt early?
When a borrower enters a credit contract they sometimes take out insurance to cover any repayments or outstanding debt if they get sick or injured, lose their job, or die. This is called consumer credit insurance.
When a borrower has taken out this sort of insurance and paid for it under the contract, then if they repay the contract early, they are entitled to a rebate. A rebate is like a refund and recognises that the insurance was for the duration of the contract and that it has not been needed for all that time.
The CCCF Act sets out the formula that lenders must use to calculate the amount of the rebate. That amount is deducted from the unpaid balance that the borrower has to pay, giving the final repayment amount.
You can read more on our page Credit-related insurance, extended warranties and repayment waivers.
Lenders and borrowersThe CCCF Act uses a number of different terms to describe lenders and borrowers, depending on the transaction:
In these fact sheets we use the terms lender and borrower to talk generally about credit transactions, but use the specific terms for consumer leases and buy-back transactions where it makes things clearer. |
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