The National Credit Act

  1. What is an arms-length transaction?

An arms-length transaction is when there are two parties transacting independent from each other. The Act will apply to an arms-length transaction. Section 4 provides a guideline on where there are exceptions to this rule.

  1. What are the limits for the lending of monies?

The Act provides for the limiting of lending money under a number of Sections. Some of these Sections are;

    • S102 – this provides for the fees or charges that a credit provider may charge in respect of an instalment agreement, a mortgage agreement, a secured loan, or a lease.
    • S103 – this applies to the amount of interest charged on the agreement. Section 103(5) of the Act provides: “Despite any provision of the common law or a credit agreement to the contrary, the amounts contemplated in section 101 (1) (b) to (g) that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs.”
      • Under S101(1) – these include initiation fees, service fees, interest, the costs of any credit insurance, default administration charges, and collection costs.

This section codified the common law in duplum rule. In duplum, translating to ‘double the amount’, under the common law, this rule was only applied to interest that was still outstanding. What this section provides is for a consumer that is in default will not be charged any further charges, providing a net of protection for the consumer. In contrast, the common law in duplum rule allowed for a creditor to charge interest when  payment was made resulting in the amount going back up.

    • S89(2) of the Act lists the circumstances in which a credit agreement would be considered unlawful. Before lending money, a credit provider will have to first assess the consumer’s debt repayment history, existing financial means, prospects and obligations, understanding of the risks and costs of the proposed credit, and his rights and obligations of the credit agreement. If a credit provider does not, this will constitute reckless lending in terms of the act. For more details on reckless credit lending, you may find this under S80 of the Act.
  1. When must one register to be a credit provider?

Under s40(1) of the Act, you must apply to be registered as a credit provider if the total principal debt owed exceeds the prescribed threshold. At current times, the prescribed threshold is currently 0 (Nil) which means that anyone who concludes a credit agreement is required to be registered as a credit provider. However, there are exceptions when this is not required. These are :

    • Incidental Credit Agreements;

An incidental credit agreement is an agreement where a person will only pay interest on the failure of paying his debt within a period of time.

    • Interest-free credit agreements;
    • Agreements between persons who are not at arm’s length.

An agreement between persons who are not at arm’s length would be a sale of a property from a parent to his child.

  1. How much interest may a lender charge?

Under s103 of the Act, you may charge interest on the agreement however, you must ensure that the interest rate applicable does not exceed the highest interest rate applicable to any part of the principal debt.

Should you require any further information please contact one of our attorneys on info@pgpslaw.co.za or one of our team here: https://pgpslaw.co.za/meet-the-team/