“A small debt produces a debtor; a large one, an enemy.” (Publilius Syrus) And in both instances, debts can also produce interest. But at what rate? This is the dilemma that many creditors encounter when faced with a recalcitrant debtor. When thinking of debt and interest rates, most people tend to think of their mortgage bonds, vehicle finance agreements and overdraft. And in these scenarios, debtors are generally left in no doubt that the banks will be charging interest and what that interest rate will be. The banks make sure of that! But what about other debtor-creditor scenarios that are so often over-looked? For example, suppliers who offer their customers thirty-day terms in which to pay. Or service providers who perform their services and then await payment from their customers. If or when the customer fails to pay, can the creditor charge interest on the outstanding amount? And if so, at what rate? The answer to the first question is “yes”. The answer to the second question is “it depends”.
If there is a written agreement in place, then check the terms. What does it say about charging interest? Ideally, there should be an interest clause that provides for the charging of interest on overdue amounts. From the time that the amount becomes overdue (ie. the day after the last day for payment, eg. day 31 if the terms are payment within 30 days) then interest can be charged at the agreed rate. For the most part, this rate cannot exceed 2% per month.
But what if there is no agreement in place? Or what if the agreement is silent on the matter of charging interest on overdue amounts? In these situations, the Prescribed Rate of Interest comes into play.
The Prescribed Rate of Interest Act provides for the calculation of interest on a debt. As at January 2016, the basis for calculating this rate is the SARB repo rate plus 3.5% p.a. When the repo rate changes, the prescribed rate of interest automatically changes. To calculate the interest rate to be applied to the debt, you look at what the repo rate was on the day that the debt arose and add 3.5%. A creditor can only start charging interest from the date that they claim the debt, ie. from the date of the demand letter, or the date of the summons.
For purpose of clarity:
- the maximum permissible rate for an incidental credit agreement under the NCA is a monthly rate (maximum of 2% per month);
- the prescribed rate of interest is an annual rate (SARB repo rate + 3.5% per year).
As you may already have calculated, a creditor is entitled to a significantly higher interest amount by charging interest of 2% per month. Suppliers and service providers are therefore urged to review their written agreements to ensure that they include provision for charging interest. Doing so will help to clarify the interest rate applicable, and avoid doubt on whether and when the creditor is entitled to charge interest on any overdue amounts.
Where can you get written contracts from? From Agreements Online, of course!
Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.