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Chapter 12 - Consumer Law

Buying on credit and credit agreements

When people need to buy expensive things like furniture, they often do not have enough money to pay cash. They can then decide to buy the expensive things on account or on credit where they pay over a period of time or at a later date. When doing this they make a debt for themselves.

When people buy on credit they do this through a credit provider. Credit providers are organisations or people that lend money - such as banks and microlenders - or that sell goods on credit, such as shops.

The National Credit Act (No 34 of 2005) (NCA)

The National Credit Act (No 34 of 2005) (NCA) which came into effect on 1 June 2007, recognizes that there are times when people need to borrow money in order to buy certain things. In other words, they need to get credit from credit providers.

The NCA provides a framework for every type of credit transaction, including microloans, homeloans, bank overdrafts and furniture finance. The NCA impacts on consumers, credit bureaus and credit providers - ranging from microlenders to banks.

The NCA introduces new rights for consumers, as well as measures that allow consumers to make informed decisions before buying goods and services on credit. It also places a greater responsibility on credit providers to refuse to give consumers credit if they cannot afford it. It will also regulate the way credit bureaus do business.

The NCA replaces the Usury Act (which governs moneylending transactions), the Credit Agreements Act (which has governed instalment sale or "hire purchase" agreements) and the Exemption Notice to the Usury Act, in terms of which microlenders have been making loans and which has exempted the microlenders from the interest rate limit placed on banks.

A new regulator, called the National Credit Regulator has also been established in terms of the NCA. This body will be responsible for enforcing the terms and provisions of the NCA. The new regulator will also educate consumers about their rights.

Purpose of the NCA

The NCA aims to create a fair non-discriminatory environment in which people borrow and lend money while at the same time guarding against people being given a loan when they cannot afford to pay it back.

The NCA refers to people who borrow as consumers and says that they should be assisted and protected in the following ways. They should be

• provided with information in a language they understand so that they may make informed decisions about borrowing money,
  
• protected from getting into too much debt,
  
• assured that credit providers follow the law when providing services to them,
  
• assured that their personal information will remain private (confidential), and given help with the management of their debt.
  

Debt management is when a person is able to control the amount of debt they make so that the monthly repayments are affordable.

The purposes of the NCA are:

‘to promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers, by:

(a) promoting the development of a credit market that is accessible to all South Africans;

(b) ensuring consistent treatment of different credit products and different credit providers;

(c) promoting responsibility in the credit market by:

(i) encouraging responsible borrowing, avoiding over-indebtedness; and
(ii) discouraging reckless credit granting by credit providers and contractual default by consumers;

(d) promoting equity in the credit market by balancing the respective rights and responsibilities of credit providers and consumers;

(e) addressing and correcting imbalances in negotiating power between consumers and credit providers by-

(i) providing consumers with education about credit and consumer rights;
(ii) providing consumers with adequate information of standardised information in order to make informed choices; and
(iii) providing consumers with protection from deception, and from unfair or

fraudulent conduct by credit providers and credit bureaus;

(f) improving consumer credit information and reporting and regulation of credit bureaus;

(g) addressing and preventing over-indebtedness of consumers, and providing mechanisms for resolving over-indebtednes;

(h) providing for an accessible system for resolving disputes arising from credit agreements; and

(i) providing for a system of debt restructuring, enforcement and judgment, which places priority on the eventual satisfaction of all responsible consumer obligations under credit agreements.

Owing money and being in debt

Why people get into debt

People borrow money for a variety of reasons, including paying for regular monthly expenses – like rent and transport, emergencies – like illness or death, occasional big expenses – like school fees and car maintenance, to buy furniture or a car or other big, expensive items, to start a small business or to pay back existing debts.

When a person wants to borrow money it is important for them to understand that buying on credit costs more than paying cash. The amount that a person ends up repaying includes:

• Basic loan
  plus
• Finance charges (includes interest on the loan, bank and administration charges)
  plus
• Insurance charges (where this is applicable)

If a person is considering buying on credit they must find out:

• What the total amount for the goods will be, including all the finance charges;
• How much the deposit and monthly payments;
• The period of time for paying off the loan.

The quicker a person pays off the debt, the lower the extra finance charges will be. The longer it takes to pay off, the more the goods end up costing.

People get into difficulty paying back the money they have borrowed for all kinds of reasons. When someone does not make the monthly payment they agreed to

when signing a contract, this is called defaulting. If a person is having trouble paying back their debts you can help them to plan and manage their finances better; and/or plan to pay off their debts.

See Problem 5: Helping a person assess their financial situation and drawing up a budget.

The consumer has the responsibility to inform the credit provider if they are unable to meet monthly repayments.

The consumer has the right to go to their credit provider to make new arrangements or payments – although the credit provider does not have to agree to the consumer’s proposed arrangements.

Difficulties with paying debts

People who are finding it difficult to pay their debts to a credit provider should approach the credit provider to try and arrange to pay their remaining instalments in an easier way. If the credit provider prefers to deal with a debt counselor (in terms of the NCA) the person will have to go to a registered debt counselor.

See Debt counseling.

The debt counselor will do a debt review and, if they find the person over-indebted (in other words, the person has too much debt that they cannot afford to repay), they may be able to get legal relief from the court so that the person can pay off the debt in a manageable way.

Important things to remember when a person borrows money:

• It is more expensive to buy on credit than it is to pay cash.
• If a person (called the consumer) signs a credit agreement, he or she must get a copy of the agreement from the credit provider.
• If the consumer is married in community of property, the law says the person’s partner (wife or husband) also owes this debt, and can be taken to court if he or she does not pay.
• If another person has been included in the contract as surety for the debt, ensure that they understand the consequences of this: surety means if the consumer does not pay, then the person who is standing surety must pay or be taken to court.
• A receipt should be issued every time the consumer makes a payment.
• Every month the consumer should receive a statement indicating how much of the debt is outstanding.
• While the consumer still owes money, you are charged interest on the money outstanding. The interest grows if the debt is not paid.

Receiving a written notice

When a consumer defaults on their payments, the first thing the credit provider will do is send a written notice. This is sometimes known as a letter of demand. In the written notice, the credit provider must:

• inform the person that s/he has defaulted on the payments, and
  
• ask that the person pays the money that is owing, and/or
  
• propose that the person consults a debt counselor or another agency so that a plan can be made to bring the payments up to date.
  

The credit provider may not begin any legal proceedings -

• until 10 working days have passed since delivery of the written notice and the person has been in default for at least 20 working days, and
  
• while the person is working with a debt counselor, an alternative dispute resolution agent or the court. An alternative dispute resolution agent is defined by
  

the NCA as any person who assists in the resolution of credit disputes through conciliation, mediation or arbitration. They must be approved by both the

consumer and the credit provider, however. Unlike a debt counselor, they do not have the right to make a recommendation to the court to declare someone over-indebted in order for their debt to be rescheduled by court order.

If a person receives a written notice from the credit provider he or she should not ignore this. They should talk with their credit providers to arrange to pay their unpaid instalments or to see if it is possible to make payments in a more manageable way. The person should also apply for a debt review from a registered debt counselor if:

• the credit provider prefers to deal with a registered debt counselor, or
  
• the case is complicated – there may have been reckless lending or the person may be over-indebted.
  

Being over-indebted

A person will be regarded as over-indebted in terms of the NCA if, at the time that an assessment of their debt is made, they are unable to pay the instalments-

• on all their debts,
  
• by the deadlines, and
  
• without borrowing more money.
  

Only the court can declare a person legally ‘over-indebted’. The court will usually do this on the recommendation of a registered debt counselor. If the debt counselor does not believe a person is over-indebted, she or he must reject the person’s application to have the debt rescheduled.

If the debt counselor assesses that the person is over-indebted, she or he can reach an agreement with the credit providers to whom the person owes money. She or he can also propose to the court to -

• declare that the person is over-indebted, and
  
• make an order to relieve their situation.
  

In addition, she or he can propose that the court assesses whether any of the credit agreements have been reckless.

Credit agreements that have been granted recklessly

Under the NCA, credit providers have a responsibility to make sure that a consumer can afford to pay back the new debt. Credit may have been granted ‘recklessly’, if:

1. The credit provider did not do all of the following before offering credit:

• check the consumer’s personal income,
  
• check the income of any financial partner(s) within the family or household,
  
• check the expected future income of their business, and

• assess whether they can make timely repayments according to their financial means,

or

2. The credit provider did the assessment and even though the outcome of the assessment was that the consumer could not afford to pay back the debt and would become over-indebted, still granted credit;

or

3. It was clear that the consumer did not understand the costs involved in the agreement.

In order for the credit provider to make a complete assessment, the consumer is expected to give this information to the credit provider so they can cross-chec this with the credit bureaus or other sources.

Only the court can declare a situation of ‘reckless lending’ which is usually done on the assessment and recommendation of a registered debt counselor. The court will only act in a case of reckless lending if the consumer has been declared over-indebted.

The court may suspend or re-arrange a credit agreement (whether recklessly granted or not). In addition, where the client is over-indebted and the credit has been granted recklessly, the court may choose to cancel the debt.

Example

Peter is a teacher. He wants to take out a loan to buy himself a good computer to install at his home. However Peter already has five other loans that he is repaying out of his monthly salary. Without checking Peter’s personal income record as well as his credit rating, the computer shop agrees to let him have the computer on credit.

According to the NCA, credit providers have a responsibility to make sure that a consumer can afford to pay back the new debt, otherwise the credit will have been granted ‘recklessly. In this case it would appear that the credit was granted ‘recklessly’.

In the following cases a credit provider does not have to check the ability of the borrower to pay back debt when making these kinds of loans:

• student loans
  
• proven emergencies
  
• public interest
  
• a pawn transaction
  
• an incidental credit agreement
  
• temporary increase in credit limit under a credit facility