Whether a creditor can charge interest or recovery fees on an overdue debt depends on what the original contract or terms of trade say. In Australia, these charges cannot be added unilaterally — they must have a clear contractual basis.
When interest on an overdue invoice is lawful
A creditor may charge interest on an overdue amount if:
- The right to charge interest is expressly stated in the contract, credit application, or terms and conditions that you agreed to; and
- The rate and method of calculation are specified or can be determined from the contract.
Where no interest rate is specified in the contract, some creditors attempt to apply a "penalty rate" or a rate based on state late-payment legislation — but this has limits and is not universally applicable to all commercial debts. A creditor cannot simply decide after the fact to add interest that was never agreed.
Recovery costs and administration fees
Similarly, recovery costs — such as administration fees, collection charges, or legal costs — can only be passed on to a debtor if the original contract expressly allows for it. If your contract does not include a debt recovery cost clause, those charges may not be recoverable from you.
What to do if you believe charges have been added incorrectly
- Locate your original contract, credit application, invoice terms or any written agreement with the original creditor.
- Check whether the contract contains a clause permitting interest and/or recovery costs.
- If you cannot locate such a clause, raise a formal dispute. You can do this at merion.com.au/dispute-a-debt/. Clearly specify which charges you believe are not contractually authorised.
Merion will put the dispute to the original creditor and provide a response with the basis for any interest or fees claimed.
Interest on judgment debts
Once a court has entered judgment on a debt, post-judgment interest applies by operation of law at the rate set by the relevant court rules — this is separate from any contractual interest and does not require a contract clause. If you have received a court judgment against you, different considerations apply.
For independent advice on whether charges on your debt are lawful, contact the National Debt Helpline on 1800 007 007.
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