We first started administering Instalment Contracts back in 2003. The trouble was, we were using a program that used the ‘American’ system of calculating loan interest, instead of using the Australian method of calculating home loan interest.
How Does the ‘American’ System Work?
Very generally, the ‘American’(read USA) system starts by looking at your loan balance each day and calculating the daily interest on your loan balance for that day, i.e. your loan balance on the day multiplied by your daily interest rate (your annual interest rate divided by 365).
This daily interest calculation is then added to your loan balance that day. This process then continues for the term of the loan.
How Does the Australian System Work?
The Australian system is based on the English system and is used by most Commonwealth countries.
Like the American system, the Australian system starts by looking at your loan balance each day and calculating the daily interest on your loan balance for that day. However instead of adding the daily interest charge to your loan balance every day, the Australian system holds off adding each calendar month’s daily interest charges until the end of each calendar month.
Regarding this Issue, the Australian Borrower is Better Off
While USA home loans may be more attractive to borrowers because most home loans are ‘non-recourse’, in the area of calculating home loan interest charges, the Australian system is more attractive to the borrower. This is because it’s better to have interest charges added to your loan balance on a monthly basis, instead of a daily basis.
Is Your Loan Administration Software Australianised?
As a vendor financier, it’s well worth the effort to check that:
- If you use loan administration software to manage your transactions, you check the software was built using the Australian method of calculating home loan interest, and
- If you’re using a vendor finance management firm to administer your transactions, you check the software they use operates within the Australian system.
Vendor Financiers who use Bilby Loan Guard to administer their vendor finance transactions can rest assured that Bilby was built and conforms to the Australian standard. This assurance flows onto users of Vendor Finance Management‘s services. This is because VFM uses Bilby.
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