Loan Agreements and the National Credit Act
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Most people are tempted to loan money to friends and business partners without thinking about the implications of the National Credit Act and whether or not they need to registered as “credit providers”. The truth is that each loan transaction needs to be considered very carefully.
When considering loan money there are a number of factors to be considered and they include the following:
- Whether or not to charge interest, fees or other charges.
- Whether or not to require security (or collateral).
- Whether or not you are required to be a registered “credit provider”.
- The amount of risk involved and risk mitigation measures.
Most people are under the mistaken belief that they are allowed to charge interest on money which they have loaned to a friend or business partner, however the truth is that upon charging interest, fees or charges the transaction immediately becomes a “credit agreement” for purposes of the National Credit Act unless certain exception apply.
In broad terms, a “credit agreement” is any agreement (or series of agreements) in which credit is extended and interest, fees or other charges are payable in addition to the capital (or security is to be provided).
In the event of almost all “credit agreements”, the lender will be required to register before the loan agreement is concluded and to comply with the National Credit Act to some extent or another.
The National Credit Act and interest, fees and other charges
Where the lender is not registered as a credit provider, the “credit agreement” (or loan agreement) will be “void” and hence the lender will not be able to reply on the agreement and hence the lender will be unable to claim interest, fees and/or other charges. It is possible for the lender to recover the capital in these circumstances, however this would require some cleaver legal footwork to convince the court to allow a claim for the capital.
The National Credit Act and security for loans
It is always a good idea to ask for security for a loan, such as the bank bonding a property as security for a loan used to buy the property. The problem with this line of thought is that extending credit and requiring security will result in the transaction being subject to the National Credit Act.
In light of the above, it is always a good idea to speak to your commercial attorney before lending money to anyone.