Debt: Can you be charged more in interest than your original loan?
Understanding the complicated in duplum rule
If you borrow money and the interest accumulates to equal the amount you borrowed, can you still be charged further interest? This is dealt with by the in duplum rule, and it is complicated and changing. The rule kicks in when a person has been defaulting on loan repayments.
In the first place, it’s important to distinguish between the common law in duplum rule which existed for about a hundred years before the statutory in duplum rule signed into law under the National Credit Act (NCA) of 2005. “In duplum” literally means “double the amount”.
The common law interpretation is that interest on a debt stops accruing once it has reached an amount equal to the outstanding debt. If you owe R2,000 and have accumulated interest on the debt up to to R2,000, no further interest can be charged.
But the common law in duplum rule does not stop interest starting to run again once you have paid the outstanding interest to below the in duplum level. So if you pay R400 in interest you can become liable again for R400, up to R2,000. You would once again owe R4,000 (R2,000 for the amount borrowed and R2,000 interest).
The common law in duplum rule only applies to interest.
The statutory in duplum rule limits all interest and other payments on debt to double the amount of the original debt — when someone is in default. So in the above example, if you paid R400 you would only owe R3,600 (R2,000 for the amount borrowed and R1,600 interest). The interest would not accumulate to R2,000 again.
But if a creditor goes to court and the court orders the debtor to pay back it is unclear how the in duplum rule applies.
The National Credit Act of 2005 has been constantly criticised for its unclear drafting and numerous cases have been brought to court to try and clarify exactly what is included and what is excluded in the statutory in duplum rule.
The statutory in duplum rule applies to all credit agreements under the NCA including banks, motor vehicle and asset finance companies. Importantly, It does not only apply to interest, but also to a number of other charges like service fees, initiation fees, administrative fees and insurance fees, under Section 103 (5) of the NCA. This means that the in duplum point is reached much sooner than under the common law, so it is a greater protection for the indebted consumer.
The statutory in duplum rule also applies for the entire period of the default, meaning that even if you reduce the outstanding charges through monthly repayments, the credit provider is not allowed to levy charges that will bring the total amount paid to more than double the original amount borrowed.
But this has not been without challenge. In 2009 the National Credit Regulator (an organ of state established by the NCA) asked the courts to clarify “interpretational difficulties” relating to the practical application of Section 103 (5). The High Court found that under this section a credit provider could not levy further charges for the entire period of the default, as described above. The credit providers were dissatisfied with this ruling and took it on appeal, but the Supreme Court confirmed the High Court’s finding.
Again in 2015, the regulator proposed new guidelines, which would allow for Section 103 (5) to apply more than once to the unpaid balance of a debt. Deborah Solomon, the founder of the DCI (a portal for the debt counselling industry) said the proposed guidelines were an “untenable interpretation” which would result in the statutory imposition of the common law in duplum rule, which was contrary to the intention of the Act.
She gave an example of a person who defaulted on her credit card payments: if her unpaid balance was R2,000 at the time of default, section103 (5) would then apply immediately which means that the consumer could not be held liable for more than R4,000. But according to the proposed guidelines, if the consumer defaulted again after paying all the charges and after continuing to make use of the credit facility, section 103 (5) could be applied again, meaning the person could be charged interest again.
Up to the present, there is still a great deal of argument about what is practically meant by the section 103 (5) rule. The banks argue that legal costs are not included within in duplum, and so the courts need to provide clarity on what is included and what is excluded by the in duplum rule.
This is underway with a class suit which was brought by Stellenbosch University Law Clinic in 2018, on behalf of ten indebted people. Creditors have argued that legal fees are not covered by the section 103 (5) rule, so that the debt spirals out of all proportion to the original default. The debtors have ended up paying many times their original debt through garnishee orders on their salaries, amongst other things.
The respondents in this case include the four big banks and a variety of other credit providers and interested parties like the regulator.
The law suit is still ongoing.
Update: This sentence was added to the first paragraph after publication: The rule kicks in when a person has been defaulting on loan repayments. The words “when someone is in default” were added to the sixth paragraph.
- You can’t be charged more in interest than your original debt.
- If other charges are added to the interest, you still can’t be charged more than double the original amount borrowed. But the banks don’t agree and have in many cases added legal fees after that amount, and that is now being challenged in court.
- If you go to court and the court rules on the debt you must pay, interest can be charged on that debt.
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