By now, the January hangover has well and truly set in. The month-long December party has left many a bank account, kitchen cupboard and Jack Daniels bottle empty, and the next pay-cheque seems but on a distant horizon. Invariably there’re a few bills that are mistakenly or not-so-mistakenly overlooked. Which may suit you if you’re the debtor. But if you’re the creditor, what do you do? For the umpteenth time, you are the one left juggling your cash flow because your debtor has unilaterally decided to delay payment. At this point you may be seriously contemplating charging interest on overdue accounts. Adding interest onto outstanding balances can be a good way of forcing a debtor to pay on time. But before you do so, there are a few things you should be aware of.
Do you have an agreement with your debtor that allows you to charge interest on overdue amounts? And does it clearly state the interest rate that would be charged? If there is no agreement in place, you cannot simply decide to charge interest. The next opportunity you have to start charging your debtor interest is when you start legal action against him. At this stage interest can be claimed in terms of the Prescribed Rate of Interest Act.
Okay. So your paperwork is in order and you’re ready to make your debtor pay. Just be aware that the moment you charge interest on an overdue account, the transaction may become an “incidental credit transaction” under the National Credit Act*, even if the underlying debt or transaction does not comprise a “credit agreement” in terms of the NCA. This does not mean you need to rush out and register with the National Credit Regulator. But it does mean that the amount of interest that you can charge is limited to the maximum amount specified in the National Credit Act. This is currently set at 2% per month.
Charging Compound interest
If you want to compound the interest charged (ie. charge interest on interest) then this needs to be expressly agreed to in your contract. If it isn’t agreed to then only simple interest can be claimed.
So, you have an agreement in place, and the interest amount is within legal parameters. You’ve started charging monthly interest at 2% on the overdue account – and the debtor is still not forthcoming with his cash. What then? Given that, by virtue of charging interest, you may have an “incidental credit transaction”, you may need to:
- Ensure that you send your debtor a monthly statement, specifying the interest charged and the amount outstanding; and
- Follow the collection process set out in the National Credit Act, which includes sending a written letter of demand to the debtor calling for payment. The contents of the letter of demand and the process followed must comply with the National Credit Act, so it may be prudent to consult an expert before taking any action.
* The NCA does not apply where the customer is a juristic entity with an annual turnover exceeding R1 million.
In Summary: Levying interest on overdue accounts can be a good way of forcing debtors to pay on time. But be aware of the legal parameters that need to be followed before you decide to charge that interest.
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.