Quick answer
Default interest is extra interest a lender charges while a loan is in default, on top of or instead of the normal interest. It usually applies from the day a payment is missed, a term is breached or a loan passes its end date unpaid. Some contracts charge it only on the overdue amount, others on the whole balance, which makes the dollar cost very different.
Key points
- It starts when a default happens and usually stops once the default is fixed
- Whether it's charged on the overdue amount or the full balance is the most important detail
- Short-term caveat and bridging loans that aren't repaid on time can run up large default charges
- Small business loan terms are covered by unfair contract terms laws carrying civil penalties since November 2023
Most loan contracts quote two prices for borrowing: the one you pay while everything runs to plan, and a higher one that applies while the loan is in default. That second price is default interest. It exists to compensate the lender for the extra risk and work of a loan that has gone off track, and to give the borrower a strong reason to fix things quickly.
When does default interest start and stop?
Check the contract for three triggers:
- A missed payment. Default interest may run on the overdue amount from the due date until it’s caught up.
- Another breach. Some contracts apply it while any event of default continues, even when repayments are current.
- Maturity. If a loan isn’t repaid by its end date, the borrower is in default, and default interest typically runs until payout.
It normally stops once the default is remedied, but read the wording: a few contracts keep charging until the lender formally confirms the breach is cured.
Which balance is it charged on?
This single detail decides whether default interest is a nuisance or a serious cost.
| Charged on | What it means in practice |
|---|---|
| The overdue amount only | A missed repayment of a few thousand dollars attracts a modest extra charge |
| The whole loan balance | The higher pricing applies to everything owed, so the cost can be many times larger |
Short-term property-secured loans most often use the second approach, especially after maturity. That’s why bridging finance and caveat loans need a realistic exit plan from day one.
Worked example: a bridging loan that runs over
A Brisbane builder takes a $400,000 six-month bridging loan, planning to repay it when a completed townhouse sells. Settlement slips by two months. Under the contract, once the maturity date passes, default interest applies to the full balance, adding about $3,300 a month on top of the normal interest.
Two months over adds roughly $6,600 in default interest alone, plus any extension or exit fee. Had the builder asked for a formal extension four weeks before maturity, many lenders would have agreed on far better terms. Modelling the delay up front in the bridging loan calculator would have shown the risk in dollars.
Already paying default charges on a short-term loan? Ask about refinancing out of it before the bill grows.
Are there limits on default interest?
Yes, two broad ones. Courts won’t enforce a charge that amounts to a penalty: something extravagant compared with the lender’s legitimate interest in being paid on time. And for small business borrowers on a lender’s take-it-or-leave-it paperwork, the unfair contract terms regime changed on 9 November 2023: an unfair clause is now unlawful as well as unenforceable, and lenders can face heavy civil penalties, with ASIC policing loans and other financial products. A default clause that’s grossly one-sided may be challengeable.
In practice, negotiation solves more than litigation. Banks that subscribe to the Banking Code commit to working with small business customers in financial difficulty. If you’re struggling, the free, independent Small Business Debt Helpline (listed in the sources below) is also an option.
Getting out from under default charges
The cheapest default interest is the kind that never starts. When a payment or maturity date is at risk, call the lender early, and if the loan can’t be fixed in place, line up a refinance before the deadline. Our guide to refinancing expensive short-term business debt walks through how.
If you’re facing a deadline you can’t meet, or default interest is already ticking, let us look at it. A minute on the form is enough, and sending it won’t trigger a look at your credit history. We don’t hawk the details to every funder going; a real lending specialist studies your loan and calls you. Include the payout figure and maturity date as they actually are so we can work to the right timeline.
Frequently asked questions
Is default interest legal in Australia?
Yes, when it's set out in the contract and isn't so out of proportion that a court would treat it as a penalty. Since 9 November 2023, unfair terms in standard form small business contracts are also illegal and can attract civil penalties, which gives borrowers another line of protection.
Can I ask the lender to waive default interest?
You can, and it's often worth asking, especially if the default was brief, caused by something outside your control, or is being fixed by a refinance. Lenders are more flexible when you contact them early and come with a plan.
Does default interest apply if my loan reaches its end date unpaid?
In many short-term contracts, yes. Not repaying by the maturity date is itself a default, and default interest may then run on the full balance until the loan is paid out.
Is default interest tax deductible?
Interest on money borrowed for business purposes is generally deductible, and default interest is usually treated the same way. Confirm your situation with your accountant, especially if the loan has a mix of business and private use.
How is default interest different from a late fee?
A late fee is a fixed dollar charge for a missed payment. Default interest accrues day by day for as long as the default continues, so it grows the longer the problem is left.