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  • Writer's pictureRikus Scheepers

The National Credit Act: he who ventures to lend, loses money and friend

Lending starts at a young age. Remember standing in line at the tuck shop and being asked to borrow a few cents for a lollipop? You probably never saw those cents again. If only we knew about charging interest from a young age, we could have built successful lending businesses by now.

As children, our innocence made us ignorant of things such as the National Credit Act. As grown-ups, we need legal advice to make sure our loan agreements are enforceable.

Don’t get me wrong, the Credit Act is not necessarily bad. It just depends on whether you are the credit provider or the consumer. Large corporate money-making machines would have eaten us all for breakfast if measures were not put in place to protect us. These large entities have resources to ensure that they comply with the Credit Act.

When it comes to loans between friends where resources are far and few between, it may seem unnecessary to obtain legal advice because the loan is based on trust rather than contract. Unfortunately, trust is not enforceable.

So when should you look out for the Credit Act?

The Credit Act applies where a credit provider enters into a credit agreement with a consumer (as private individuals, most of you reading will be classified as consumers) and where you are dealing at arm’s length. You are dealing at arm’s length when you are independent of one another and acting in self-interest.

It means that something like a loan between family members who are dependant on each other is not a transaction where the parties are dealing at arm’s length. There are a few other more complicated examples, but let us stick to loans between friends.

So does the Credit Act apply to a loan between friends?

The obvious determining factor is whether you as the lender derive some benefit from the loan. Are you acting in self-interest by trying to make a few bucks from a friendly loan? This can be in the form of interest, a charge, or a penalty.

It does seem unfair that you cannot provide for inflation, but the letter of the law is clear and you cannot contract out of the Credit Act. If you want to escape the Credit Act, you have to let the interest go.

Simplified, if you give someone R100 and get R101 in return, you derive a benefit. It means you entered into a credit agreement. It is a lot more complicated than it sounds, and that is why a simple agreement drawn up between yourself and your friend will not necessarily cut it.

Most friendly loans work out. The issues with the Credit Act arises when it doesn’t.

So what happens if you ignored the Credit Act and your friend becomes a stranger?

The issue that your attorney will point out, is that you were not registered as a credit provider.

It is difficult to comprehend that a simple loan to a friend means that you will be classified as a credit provider. That is the case in most circumstances. Even where it is a once-off transaction, you are not excused from registering as a credit provider.

If you are not registered as a credit provider, you cannot enforce the credit agreement.

What now?

There is one more option when attempting to recover a loan, and that is to institute a claim based on unjustified enrichment. Unjustified enrichment means your friend was enriched at your expense. It does not mean that you can claim the interest with the amount you loaned to your friend and is limited to only the actual enrichment and/or impoverishment.

Depending on the time that has passed since you made the loan, your claim might have prescribed and become unenforceable. Claims generally prescribe after three years. Three years pass in the blink of an eye and it is important not to be overly lenient, or you may lose the loan, the interest and a friend.

If you feel like the loan shark in your friend group, or if you want to help someone out without exposing yourself, speak to an attorney. Spending a little extra before loaning to a friend may save both money and friend in the long run.

If you want to know more about the National Credit Act, or if you think you may need some advice about a loan, get in touch and we will see how we can help you.


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