What is a Credit Agreement?

A credit agreement described by the Act is either:

• A credit transaction
• A credit guarantee
• A credit facility or
• Any combination of the above

Let’s delve for a moment into the different types of Credit Agreements that are covered by the National Credit Act.

Credit Transactions

A credit transaction, generally, refers to transactions where payment for goods or services is deferred and interest and other charges are paid for so long as payment has not been made in full. Section 8(4) of the Act defines a credit transaction as any one of the following:

• A pawn transaction
• A discount transaction
• An incidental credit agreement
• An instalment agreement
• A mortgage agreement
• A secured loan
• A lease of movable property and
• Any other agreement where payment of an amount owed is deferred and interest or fees are charged

Let’s elaborate and get some clarification on the above-mentioned credit transactions.

A Pawn Transaction

A pawn transaction is defined by the Act as an agreement in terms of which a credit provider advances money or grants credit to a consumer and at the same time takes possession of goods given as security by the consumer.

And either; (a) the estimated value of the goods exceeds the loan amount or (b) a charge, fee or interest is charged on the amount disbursed. A pawn transaction must typically allow the credit provider the right to sell the goods given as security in the event of default of payment and to retain the proceeds of the sale.

A Discount Agreement

Discount agreements are agreements where credit providers offer goods and services to consumers over a period of time and quote more than one price ; (a) a lower price is applied in the event payment is received within a shorter period of time and (b) a higher price or prices are applied if payment is received over a longer period of time

Incidental Credit Agreement

An incidental credit agreement, as the title suggests, is not considered primarily as a credit agreement.

It is regulated merely because it may have some attributes of a credit agreement.

The Act defines an incidental agreement as an agreement in terms of which an account is rendered for good and services that are provided to a consumer over a period to time, and; (a) a fee, charge or interest becomes payable if the account is not paid within a specific time, or (b) two prices are stated for the payment of the account, with a lower price being payable if the amount is paid early; before the agreed date and a higher price being paid if payment is made after the stated date.

An incidental credit agreement can also arise in terms of section 4(6) (b) of the Act, where a supplier of a utility or a continuous service provider provides services to a consumer from time to time and defers payment for the services until an account has been given to the consumer and does not charge any interest or fees on the deferred amount unless the consumer fails to effect payment within 30 days after the delivery of the statement to him.

Here’s an example of what I’m talking about above:

*Let’s say I enter into a cell phone contract and am billed on a monthly basis to settle the outstanding amount at the end of every month. This is not a credit agreement; however, should I fail to pay at the end of a specific month, the service that the cell phone company has been providing has the characteristics of credit. The amount payable is deferred and interest is added to the outstanding amount. This agreement will now become incidental credit.

*Other examples would be the local government providing electricity on an ongoing basis and professionals rendering accounts for services rendered.

An Instalment Agreement

An instalment agreement is defined in the Act as an agreement that sells movable property on the basis that; (a) the price is deferred and is paid in instalments over a period of time, and (b) possession and use of the goods are transferred to the consumer and (c) either ownership of the goods passes to the consumer once all payments have been made or it passes immediately after the conclusion of the agreement but the credit provider retains a right to repossess the property should the consumer default in his payments. (Usually, the purchasing of furniture is done in terms of an instalment sale agreement).

Mortgage Agreement and Secured Loans 

Both mortgage agreements and secured loans are money lending agreements. The former is secured by immovable property and the latter by movable property in the form of a pledge or a cession of rights.

*A mortgage agreement would be the home loan obtained from the bank to purchase a house and in return the bank registers a bond over the property to serve as security should the consumer fail to make his bond payments.

*A secured loan would be where a personal loan is taken and as security for the loan, the consumer would pledge some movable asset such as a vehicle or share certificate.

A Lease of Movable Property

A lease of movable property can constitute a credit transaction if:

• Temporary possession of the property is given to the consumer, and
• Payment for the possession and use of the property is deferred during the agreement, and
• Interest, fees and charges are payable on the amount deferred, and
• At the end of the lease agreement, ownership either passes to the consumer absolutely or passes to the consumer upon satisfaction of specific conditions set out in the agreement.

*An example of this would be leasing a fax/copier from a company such as Nashua where the agreement states that at the end of the lease period, the consumer has the option of paying a Rxx and taking ownership of the fax/copier.

A Credit Transaction

A credit transaction can also be any agreement other than a credit facility or a credit guarantee where an amount that is owed is deferred and interest or charges are paid for the deferred amount or a charge or fee is payable in respect of the agreement. This includes all money lending transactions including so called micro-loans.

Credit Facility

A credit facility is broadly defined in the Act. Section 8(3) defines it as:

• An agreement in terms of which a credit provider undertakes to provide services, money or goods to a consumer, or at the direction of a consumer, from time to time and
• Defers the obligation to pay any part of the cost of the service provided, or the money given or the good supplied, or
• Bills the consumer periodically for the service or good or money, and
• Charges a fee or interest for any amount deferred or any amount not paid within a stipulated time.

*Credit facilities would typically include revolving credit facilities like credit cards, store cards and overdraft facilities. Examples would include Edgards cards, Truworths cards, and Woolworths cards.

Credit Guarantees

A credit guarantee is defined in section 8 (5) as an agreement in terms of which a person undertakes to meet any credit obligation (which is covered by the Act) of another person. The Act refers to the agreements as credit guarantees, which seems to be the same as a surety agreement.

Combinations

A combination of credit guarantee and credit transaction would also be regarded a credit agreement. An example of such a combination would be if a close corporation applies for a credit card and the members sign as surety for the card payments. Another example would-be so-called access bonds where we have a combination of mortgage transactions and a credit facility as the consumer is allowed to withdraw money against the account. The access bond thus creates a form of revolving credit e.g., a credit facility.

*Note, where the principal agreement is excluded from the Act, the guarantee would also be excluded as well as the suretyship (credit guarantee). For example, where a close corporation with an annual turnover of R1 million applies for a credit card and the members sign surety for the card payments, the credit card agreement as well as the sureties are excluded from the provisions of the Act.

Exclusions

Section 8(2) stipulates that the following agreements are not credit agreements:

• A policy of insurance or credit that is offered by an insurance company solely for the purpose of maintaining premiums of an insurance policy
• A lease of immovable property,
• A transaction between a stokvel and a member of that stokvel in accordance with the rules of that stokvel.

Developmental Credit

Section 10 of the Act states that the following credit agreements could be regarded as developmental credit:

• A loan of less that R15000 between a co-operative and its member
• Educational loans where the monies are paid directly to the institution
• Agreements with the following purpose: Acquisitions, rehabilitation, building or expansion of low-income housing, and development of a small business

Developmental credit is not exempted from the Act, but receives ‘special’ treatment in terms of the Act.

The pricing of these loans is different and slightly higher from any other form of credit. The marketing of developmental credit at a person’s place of residence or place of employment requires no consent, as is the case with other forms of credit.

*A consumer, who wants to register a close corporation and start a taxi business, would have to apply for a developmental loan.

Public Interest Credit Agreement – Section 11

The minster may declare that credit agreements entered into in specified circumstances, or for specific circumstances, during a specific period, are public interest credit agreements, this would normally be done in order to promote the availability of credit in all or part of the Republic in circumstances of natural disaster or similar emergent and grave public interest.