Legal Limits on Late Fees, Interest, and Additional Costs in NZ (B2C vs C2C)

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Overview

Late fees and interest on late payments are permitted under the laws of New Zealand. However, these charges are regulated to ensure they are reasonable and not punitive. The rules differ depending on whether the transaction is business-to-consumer (B2C) – where consumer protection laws apply – or consumer-to-consumer (C2C), which relies more on general contract law. Below we outline the key legal limits and requirements, referencing the Fair Trading Act 1986, the Credit Contracts and Consumer Finance Act 2003 (CCCFA), and related law, and note any differences for C2C deals.

Statutory Limits on Late Fees and Interest (B2C)

Fair Trading Act 1986: Unfair contract terms

The Fair Trading Act (FTA) prohibits unfair terms in standard form consumer contracts (typically B2C contracts offered on a “take it or leave it” basis). A term imposing an excessive fee for late payment can be deemed unfair if it causes a significant imbalance in the parties’ rights and is not reasonably necessary to protect legitimate interests. In fact, any term that requires a consumer to pay an excessive amount for breach (far above the actual loss to the business) is considered a penalty, which contract law will not enforce and which is also an unfair term under the FTA . If a court declares a late fee term unfair, the business cannot enforce it. In practical terms, this means B2C contracts should not include punitive late charges that greatly exceed the costs or losses the business incurs from the delay in payment.

Credit Contracts and Consumer Finance Act 2003 (CCCFA)

If the transaction involves a form of consumer credit – for example, the consumer buys goods or services on credit or a payment plan, or the contract allows interest to be charged on overdue amounts – then the CCCFA may apply. The CCCFA sets clear limits and standards for interest and fees in consumer credit contracts:

General Requirement of Reasonableness

Credit fees (including establishment fees, administrative fees, etc.) and default fees (fees for late payment or other breaches) must be reasonable. By law, these fees can only cover costs closely related to the particular transaction or the borrower’s default – they cannot be used to recover general overhead or to profit from the customer . The New Zealand Supreme Court has affirmed that fees should correspond to actual costs incurred due to the borrower’s contract, and not include a margin for profit.

If a fee is found unreasonable (out of proportion to the cost or loss it is supposed to cover), it breaches the CCCFA. The Commerce Commission (NZ’s consumer watchdog) has successfully taken lenders to court for charging excessive credit fees. For example, in Commerce Commission v Sportzone/MTF, the courts ruled that certain establishment and default fees were unreasonable because they recouped more than the actual costs of the loan transactions; the Supreme Court held that such fees must not subsidise general business costs or create profit – “that is what interest is for” .

Interest Rate Caps for High-Cost Loans

While the CCCFA does not impose a blanket interest rate cap for all consumer credit, “high-cost” consumer credit contracts (generally defined as loans with annual interest 50% or higher) face strict limits.

For these loans, regulations introduced in 2020 cap the total cost of borrowing and the rate of charges. Lenders cannot charge more than 0.8% of the unpaid balance per day in interest and fees (on average over the loan term) , cannot charge compound interest, and cannot make the borrower repay more than 100% on top of the amount originally borrowed (in other words, total repayments are capped at twice the principal). There is also a specific cap on default fees for high-cost loans: any late payment (default) fee must be $30 or less (a higher amount is presumed unreasonable unless the lender can prove it’s justified).

These caps are designed to prevent predatory lending practices and limit the accumulation of huge debts from interest and penalties.

(Note: For ordinary consumer credit contracts that are not “high-cost”, there isn’t a fixed numeric cap on interest rates in the CCCFA. However, an extremely high interest rate could be challenged as oppressive under the CCCFA’s general prohibitions, or struck down as a penalty under common law if it’s effectively punitive.)

Default Interest vs. Regular Interest

The CCCFA distinguishes default interest (a higher interest rate applied only to amounts in default) from the ordinary interest rate. Default interest can only be charged on the amount in arrears and only for the period of default – not on the total loan balance . Like any contract term, a default interest rate that is exorbitant could be deemed unreasonable or oppressive. For high-cost credit contracts, as noted, the daily rate of all charges (interest + fees) is capped at 0.8%, which effectively limits default interest as well .

Common Law – Penalties Doctrine: Independent of specific statutes, NZ courts apply the common law penalties doctrine to any contract (consumer or otherwise). In 2020, the New Zealand Supreme Court confirmed the modern test for what counts as an unenforceable penalty: Does the charge impose a detriment out of all proportion to the innocent party’s legitimate interest in the performance of the contract? . In the context of late payments, the “innocent party” is the seller/creditor, and their legitimate interests include recovering the actual loss caused by late payment (for example, lost use of the money, financing costs, or extra admin work) and deterring delay in payment. If a late fee or interest rate is so excessive that it far exceeds any conceivable loss or interest the business has in being paid on time, a court would likely consider it a penalty and refuse to enforce it. Put simply, New Zealand law (as in other common law countries) will not enforce a punitive clause that is essentially a punishment rather than compensation . This means charges must be proportionate – a point echoed by the FTA’s unfair terms provisions and the CCCFA’s reasonableness requirement.

Summary of Limits

In a B2C scenario, there’s no law saying “you can only charge X% late interest”. Instead, the law expects any late fee or interest to be reasonable and proportionate:

If it’s interest on overdue payments, keep it within a reasonable annual rate (e.g. something comparable to market lending rates, not an astronomical figure). The CCCFA’s high-cost loan cap of 0.8% per day (approximately 292% per annum) is an absolute ceiling for those specific loans , but most businesses would charge far less. Many businesses choose an interest rate for late payments such as 1%–2% per month (12–24% p.a.), which, if clearly agreed, is generally considered acceptable. Excessive rates could be struck down for consumers as unfair or oppressive if challenged.

If it’s a fixed late fee, it must be a modest sum reflective of extra costs incurred (e.g. administrative costs). Regulators have indicated that default fees above $30 are suspect in consumer lending , at least for small loans, so that gives a sense of scale. There’s no magic number in all cases, but “exploitative” or windfall fees are prohibited.

New Zealand’s Consumer Protection guidance sums it up well: a late payment clause demanding much more than the loss the lender or supplier suffers is likely an unenforceable penalty . Businesses can charge late fees or interest, but the onus is on the business to ensure the charge is reasonable.

Additional Costs (Admin Fees and Similar Charges for Overdue Payments)

Besides interest or a one-off late fee, creditors sometimes want to recover other costs associated with a customer’s default – for example, an administration fee for sending reminder letters, or the cost of issuing a formal notice.

Under NZ law, a creditor can claim such costs only if the right to do so is part of the contract and the costs themselves meet the tests of reasonableness described above.

Contractual Basis: A consumer is only obligated to pay additional fees (beyond the principal debt) if they have agreed to those terms in the contract or credit agreement. If the contract is silent about charging an admin fee for late payment, the business cannot simply invent a fee after the fact. (They could still potentially recover some collection costs as damages through a court judgment, but that’s a different process and subject to court discretion.) Therefore, any late-payment admin charges should be clearly outlined in the terms and conditions or contract that the consumer accepts.

Reasonableness of Amount: Any default charge like an administrative late fee must be reasonable in amount. Under the CCCFA, default fees can only cover the costs resulting from the default or breach . This means, for instance, if sending an overdue notice or doing extra account handling costs the business an estimated $15, the default fee could be set around that amount. If a business tried to charge (say) a $100 “administration fee” for a late payment when the actual admin cost is minimal, that fee would likely be deemed unreasonable and unenforceable (either under the CCCFA if applicable, or under the penalty rule in general contract law). The law even creates a rebuttable presumption that default fees above $30 are unreasonable for high-cost consumer loans – while this specific presumption applies to those high-interest loans, it signals that regulators expect default fees to be relatively low unless justified by actual costs.

No Double-Dipping: A creditor should not charge multiple fees for the same underlying cost. For example, if interest is already compensating the creditor for the time-value of money and risk of non-payment, and a separate “late fee” or “admin fee” is also charged, the sums collectively should still align with actual costs or losses. The CCCFA explicitly disallows spreading general business costs across fees to inflate them . Each fee must stand on its own feet as reasonable for what it covers. In essence, additional fees must truly be about cost recovery, not profit .

Examples: A small late fee (say $10 or $20) for a missed payment deadline could be justified as an admin cost (covering extra processing, reminder correspondence, etc.). A dishonour fee (if a payment bounces) similarly should reflect bank charges or handling costs. These kinds of fees are common and generally enforceable if disclosed. In contrast, an outsized fee (e.g. “$100 per week late fee” on a low-value purchase) would likely be seen as an unenforceable penalty unless the business can show that such a high amount corresponds to real costs or a legitimate interest (which is rarely plausible in a consumer context).

In summary, additional costs like admin fees can be claimed for overdue consumer payments – but only pursuant to a contract term, and the amount must be kept within fair and actual costs. Otherwise, the fee will be unenforceable (and potentially illegal under the CCCFA or FTA). Always ensure such fees are transparently disclosed to the consumer before they incur them.

Drafting Enforceable Late Payment Clauses (Avoiding “Unfair Penalty”)

To make sure late payment charges are legally enforceable, businesses should draft contract terms carefully. The goal is to clearly define the charges as part of the agreed terms, and set them at a level aimed to recoup costs or losses, not to punish the customer. Here are some guidelines for contract wording:

Clarity and Disclosure: Include a dedicated clause in the contract (or terms and conditions) that explains the payment due date and what happens if payment is late. The language should be easy to understand. For example: “Payment is due within 30 days of invoice date. If any amount remains unpaid after the due date, [Company] may charge interest on the overdue sum at the rate of X% per annum from the due date until payment is made in full.” This makes it clear to the consumer that interest will accrue on late payments. It’s important that the customer agrees to these terms (typically by signing the contract or accepting the T&Cs), because without agreement, the charge may not be binding.

Specify Any Fixed Fees: If you intend to charge a one-off late fee or admin fee, specify it explicitly. For example: “Additionally, a late payment fee of $20 will be added to cover the administrative costs of processing overdue accounts.” Stating the dollar amount (or the method of calculating it) in the contract leaves no ambiguity. It’s also wise to label the purpose (e.g. “administrative costs”) which signals that the fee is meant to compensate for a real expense, not simply penalize the debtor.

Keep Charges Proportionate: Ensure that the interest rate or fee amount is not excessive. What is “excessive” can depend on context, but in consumer contracts it’s safest to keep late interest rates within a moderate range (for instance, under 2% per month, unless you have a special justification). A fixed late fee should be a modest sum (tens of dollars at most, usually). Remember that NZ courts assess proportionality to the creditor’s legitimate interest . A reasonable late charge protects the business’s interest in being paid promptly (covering things like financing costs, credit risk, and extra admin work). If the charge clearly overshoots that mark – for instance, a $50 fee for being one day late on a $100 purchase – it risks being seen as “out of all proportion” to the actual harm caused, and therefore an unenforceable penalty . Draft the amounts with an eye toward what actual loss or cost the business incurs when payments are late.

Avoid Penal Language: Do not refer to the charge as a “penalty” in the contract, and avoid any implication that it’s intended as a punishment. The term “liquidated damages” can be used for a pre-agreed amount intended to cover damages from breach. For example, “The parties agree that the late fee is a genuine pre-estimate of the administrative costs and inconvenience that [Company] will incur if payment is late.” While you don’t need to include such a justification in the clause, having it documented (or at least being able to explain it if challenged) helps show the charge is fair. The key is that at the time of contracting, the fee/interest is aligned with a legitimate interest of the business (like recovering costs or deterring non-payment) and is not “extravagant or unconscionable” in amount .

Compliance with CCCFA (if applicable): If your contract is a consumer credit contract (e.g. providing services now and letting the consumer pay later with interest), ensure you also comply with CCCFA disclosure requirements. The contract or disclosure statement should itemize the annual interest rate, how interest is calculated, and all fees that may be charged . Failure to properly disclose can itself make the charges unenforceable until disclosure is corrected. Also, make sure any default interest is only charged on the overdue amount (not on the entire balance) , and that default fees are set at levels you can justify as reflecting costs .

By drafting clear and fair terms, a business greatly increases the likelihood that late fees or interest will be enforceable. A well-drafted clause not only deters late payment but also protects the business if a dispute arises, as the clause will be viewed as part of the bargained agreement rather than an oppressive surprise to the consumer.

Do you need assistance with drafting or enforcing the terms of your contract? Contact YJ Consulting today to assist with negotiations and drafting to ensure you’re legally protected.

Can Businesses Recover Debt Collection Costs from Consumers?

Often, if an account goes seriously overdue, a business might engage a debt collection agency or legal firm to recover the debt. The question then is whether the costs of collection can be passed on to the debtor (the consumer). Under New Zealand law, yes – a business can make the consumer pay for debt collection costs, but only under certain conditions:

Advance Agreement: The right to recover collection costs from the debtor must be provided for in the contract or credit terms that the consumer agreed to. Typically, contracts will have a term saying the debtor is liable for any reasonable costs of recovering overdue payments, including agency fees or legal fees. If the consumer was not told upfront that they’d have to pay collection costs, then demanding those extra costs later is not enforceable . (Consumer protection guidance even suggests that the notice can be relatively simple – e.g. a sign in a store or a note on the back of a ticket could suffice as disclosure – but the safest route is always a written term in the contract.)

At Cost (No Mark-Up): Even when the contract allows recovery of collection costs, the business can only charge the actual costs incurred, without adding any margin. The CCCFA and Commerce Commission guidance make this clear: “Any fees the debt collector charges the lender can be passed on to you if it says so in the contract. [But] the lender must pass the fee on at cost, i.e. not add anything to it.” . For example, if a debt collector charges the company a 20% commission on the debt or a flat $100 fee, the company can seek that $100 or 20% from the debtor if agreed, but the company cannot tack on an extra service charge on top of what the collector billed. The underlying principle is the same as for other fees – it should cover the expense the creditor actually faces due to the breach, not serve as a profit center.

Reasonableness: All collection costs claimed must still be reasonable. A court or the Commerce Commission could scrutinize a collection fee that seems excessively high relative to the debt. For instance, hiring an overly expensive private investigator to chase a small debt and then charging the entire bill to the debtor might be challenged. In practice, most collection agencies in NZ work on standard rates (contingency fees or set fees) that courts generally accept if the contract permits passing them on. The CCCFA would view exorbitant collection charges as oppressive or unreasonable. In one scenario, if a lender attempted to charge defaulting borrowers hundreds of dollars in collection-related fees that weren’t closely linked to actual costs, that could breach CCCFA’s fee provisions .

Legal Costs: If the matter escalates to a lawsuit, whether the business can recover legal fees (beyond normal court-awarded costs) from the consumer again depends on the contract. Many contracts state that solicitor-client costs or indemnity costs of collection will be payable by the debtor. New Zealand courts will enforce such clauses to the extent they are reasonable and not a penalty. However, for consumer contracts, there is a risk that an open-ended indemnity for “all costs” could be seen as an unfair term if it results in the consumer bearing disproportionate expenses. It’s wise to limit this to “reasonable” or “actual” costs. Also note that even with such a clause, court rules on awarding costs can influence the outcome (the court might award standard scale costs, and only if there’s a shortfall would the contractual clause come into play to claim the difference).

Example: A useful illustration is given in a Consumer Protection example. A library’s membership terms stated that if customers fail to return books and the account is sent to a debt collection agency, the customer will have to pay the collection fee. A patron neglected to pay fines for overdue books; the library eventually sent the $ unpaid fine to a collector, who added a $45 collection fee. Because the patron had been warned about this fee in the membership terms, he was legally obliged to pay both the fines and the $45 collection charge . If the library had not disclosed this possibility when he signed up, the $45 fee would not have been enforceable. This example reflects the general rule: prior disclosure and reasonable cost.

In short, businesses can pass on debt collection costs to a consumer provided it was part of the agreement with the consumer. The charges must be limited to what the business actually pays for the collection efforts (no padding), and they should be in line with what’s reasonable. Many businesses include a term about collection costs in their credit agreements or standard terms to cover this scenario. Without such a term, the business would typically have to absorb those costs or rely on the court’s normal cost recovery processes.

C2C Transactions: Differences in Enforceability

When a transaction is consumer-to-consumer (C2C) – for example, a private sale where an individual (not in trade) sells goods or lends money to another individual – the dynamic changes because most consumer protection statutes assume a business on one side. Key differences include:

Fair Trading Act Not Applicable: The Fair Trading Act (including its unfair contract term provisions) only applies to conduct by a person “in trade”. A private seller who isn’t in business is generally not “in trade,” so the FTA’s provisions (like the ban on unfair contract terms or misleading conduct in trade) do not apply. This means a purely private sale contract won’t be scrutinized under the FTA. For instance, if a private seller inserted a steep late fee in a contract with a buyer, the Commerce Commission would not have jurisdiction to challenge it as an unfair term, because the seller isn’t a business supplying a consumer. The enforceability would instead be determined solely by contract law principles.

CCCFA – Usually Not Applicable in Practice: The CCCFA primarily targets consumer credit contracts provided by lenders in the business of lending. Technically, the definition of a consumer credit contract doesn’t absolutely require the lender to be a registered finance company or trader – it hinges on the nature of the borrower (individual for personal purposes) and the contract involving credit/interest/fees. In theory, a private loan between two individuals could fall under the CCCFA’s definition (if interest or credit fees are charged). However, a one-off private loan or sale on credit is unlikely to have complied with CCCFA disclosure and other requirements, and enforcement of CCCFA duties against a truly private lender is rare. In short, most C2C arrangements are not practically regulated by the CCCFA. The borrower wouldn’t typically know to invoke CCCFA protections, and the private lender might not even realize their arrangement could be seen as a credit contract. That said, if a private lender tried to charge an exorbitant interest or fee, a court could still find it oppressive under general contract law or even potentially under CCCFA if a clever argument was made that CCCFA applies. But by and large, C2C debts exist in a sort of unregulated space compared to B2C credit.

No Statutory Caps or Presumptions: In a C2C deal, there are no specific statutory caps on interest or late fees. For example, two friends could agree informally that one will pay the other 10% interest per month on a loan – a rate that would be illegal for a commercial lender under CCCFA if it were a high-cost loan, but between private parties this law wouldn’t intervene. The only limit would come if the matter went to court and a judge found the term unconscionable or a penalty under common law or equity. New Zealand courts can provide relief against highly unfair contract terms even outside statutes, under doctrines of undue influence, unconscionability, or penalties. So a truly extortionate interest rate or late fee between private parties might not be enforced if challenged, but that would be on a case-by-case basis rather than thanks to a consumer law.

Enforcement and Dispute Resolution: If a C2C transaction goes wrong (say, the buyer doesn’t pay and the private seller wants to charge late fees), the resolution would typically be through a civil claim – often in the Disputes Tribunal or District Court, depending on the amount. The tribunal or court will look at the contract. They will apply the normal contract law principles, including the rule against penalties. As noted earlier, the common law rule on penalties applies to all contracts. So if, for example, one individual sells a car to another for $5,000 with an agreement that a late payment will incur a $500 fee, a tribunal might well consider $500 excessive relative to any actual loss from a short delay, and thus not enforce that part (the buyer would still owe the $5,000 and perhaps some interest as compensation, but not the punitive $500). The analysis is similar to a B2C scenario, minus the extra layer of consumer statutes.

No Regulator Oversight: In C2C situations, there is no Commerce Commission oversight or consumer affairs body to complain to about unfair terms, because those regulators only oversee traders. It’s essentially a private matter. This means the protections for the owing party (who in a C2C deal might not even be a “consumer” in the statutory sense if, say, it wasn’t for personal use) are less accessible. They would have to rely on negotiating with the other person or raising defenses in court if sued. For the party trying to impose the late fee, this means there’s also a bit more risk and uncertainty – without a clear legal framework, it’s down to whether a court thinks your clause is enforceable.

Bottom line for C2C: A private individual can charge interest or late fees to another individual if they have an agreement to that effect, but any such charges must still not be punitive. The lack of specific statutes doesn’t give free rein to impose outrageous penalties – New Zealand courts would still likely refuse to enforce a truly unfair or extortionate term under general doctrines. However, because consumer legislation (CCCFA, FTA) is generally not in play, the private parties don’t have strict guidelines or automatically void terms; it will depend on general contract fairness and the specifics of the case. It’s wise even in C2C deals to put any interest or late fee agreement in writing and keep it reasonable, to avoid disputes. If a private seller wants to ensure they can recover costs of chasing payment, they should expressly include that in whatever written agreement they use (though in informal deals, often nothing is written, which makes any extra fees even harder to claim).

References

Fair Trading Act 1986, ss 26A & 46H-46M – Unfair contract terms provisions (applicable to standard form consumer contracts). Example guidance: penalty fees far above actual loss are considered unenforceable penalties and unfair .

Credit Contracts and Consumer Finance Act 2003 – various sections regulating interest and fees in consumer credit contracts.

Section 41 (as interpreted by case law) requires credit fees to be reasonable relative to costs;

Section 44 requires default fees to be reasonable. Sections 45B-45H (added in 2020) impose caps on high-cost loans (e.g. max 0.8% per day, $30 default fee) .

Commerce Commission v Sportzone Motorcycles Ltd & Motor Trade Finances Ltd [2015] NZCA 78, upheld by [2016] NZSC 53 – landmark case confirming that credit fees must only cover transaction-specific costs (no padding of profit or general expenses) .

127 Hobson Street Ltd v Honey Bees Preschool Ltd [2020] NZSC 53 – Supreme Court decision adopting the “legitimate interest” test for penalties (a charge is unenforceable if out of proportion to the innocent party’s legitimate interest in performance) . This case aligns NZ law with the UK and affirmed that deterrence can be a legitimate interest but pure punishment is not.

Consumer Protection NZ – Guidance on Unfair Fees and Contracts: clarifies the 0.8% daily cap and $30 default fee limit for high-cost loans , and notes that unreasonable fees can be challenged or reduced. Also, it explains that penalty clauses (excessive breach fees) are not enforceable at law .

Consumer Protection NZ – Debt Collection: explains that debt collection fees can be passed on only if disclosed upfront, and even then only at actual cost . (E.g. if a ticket or contract warns of a collection fee, the debtor must pay it when applied .)

Community Law NZ – Discussions on unfair contract terms and the definition of consumer contracts (confirms FTA’s scope is business-to-consumer, not private sales). Although not directly cited above, it’s understood that a “consumer” contract under these laws involves a supplier “in trade.”

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