# Credit Contracts and Consumer Finance Regulations 2004

##### 9 Calculation of reasonable estimate of creditor’s loss if interest rate fixed for whole term

(1)

For the purposes of section 54(1)﻿(a) of the Act, a reasonable estimate of a creditor’s loss arising from a full prepayment of a fixed rate contract may be determined in accordance with the following formula:

LRE = VFPu

where—

LRE

is the reasonable estimate of the creditor’s loss arising from the full prepayment

VFP

is the value of forgone payments calculated in accordance with subclause (2)

u

is the unpaid balance at the time of the full prepayment.

(2)

The value of forgone payments is calculated in accordance with the following formula: where—

VFP

is the value of forgone payments

p

is the amount of each payment payable under the fixed rate contract

v

is calculated in accordance with subclause (3)

n

is the number of payments yet to be made under the fixed rate contract

f

is the number of payments to be made per year under the fixed rate contract

i

is the annual fixed interest rate determined in accordance with subclauses (4) and (5) and expressed as a decimal fraction

d

is the number of days between the payment due date that immediately precedes the date of full prepayment and the date of full prepayment.

(3)

The variable v is calculated in accordance with the following formula: where—

i

is the annual fixed interest rate determined in accordance with subclauses (4) and (5) and expressed as a decimal fraction

f

is the number of payments to be made per year under the fixed rate contract.

(4)

The annual fixed interest rate i is the annual fixed interest rate that at the date of full prepayment of the fixed rate contract the creditor usually offers on a fixed rate contract that—

##### (a)

is of the same or a similar type as the fixed rate contract that is to be fully prepaid; and

##### (b)

has a term that is—

##### (i)

equal to the unexpired portion of the term of the fixed rate contract that is to be fully prepaid; or

##### (ii)

closest to the unexpired portion of the term of the fixed rate contract that is to be fully prepaid, whether shorter or longer (if the creditor does not offer a fixed rate contract with a term equal to the unexpired portion of the term of the fixed rate contract that is to be fully prepaid).

(5)

If more than 1 annual fixed interest rate applies under subclause (4)﻿(b)﻿(ii), the annual fixed interest rate i is the higher or highest of those annual fixed interest rates.

(6)

If a reasonable estimate of a creditor’s loss arising from a full prepayment determined in accordance with the formula in subclause (1) is less than zero, then the reasonable estimate of that creditor’s loss arising from the full prepayment is zero.

###### Example

A debtor is advanced \$5,000 under a fixed rate contract. The contract is for a term of 2 years. The annual interest rate for the whole term is 12%. Each of the 24 monthly payments is \$235.37. Full prepayment of the contract is made after 6 months and 5 days (5 days since the last payment due date) when the unpaid balance is \$3,865.66. At the date of full prepayment, the annual interest rate that the creditor usually charges on a fixed rate contract of the same or a similar type as the fixed rate contract that is to be fully prepaid with a term of 12 months is 10% (a 12-month fixed rate contract having an interest rate of 10% being closest in term to the 18-month unexpired portion of the term of the fixed rate contract that is to be fully prepaid). Applying the above formula, a reasonable estimate of the creditor’s loss arising from the full prepayment is calculated as follows:

p = \$235.37

n = 18

f = 12

i = 0.1

d = 5

u = \$3,865.66 LRE = \$3,924.23 − \$3,865.66 = \$58.57

A reasonable estimate of the creditor’s loss is \$58.57.

If, however, in the above example the interest rate for fixed term contracts offered by the creditor for a term of 12 months was 15%, then variables v and VFP would be: LRE would then be calculated as follows:

LRE = \$3,780.11 − \$3,865.66 = − \$85.55.

A reasonable estimate of the creditor’s loss in this case would be zero.

Note: For the purpose of this example only, calculations have been rounded to 9 decimal places.