On 8 January 2016 the Judicial Matters Amendment Act, 24 of 2015, came into effect effectively amending the Prescribed Rate of Interest Act’s previous rate of 9% to 9.75% per annum. The Act was further amended to the extent that the prescribed rate of interest will no longer be fixed for extended period of times, but will become a moving target.
The amendment to The Act entails that the prescribed rate of interest will from date of implementation of the amendment be calculated at the repo rate determined by the South African Reserve Bank, from time to time, plus 3.5%. The amendment of the prescribed interest rate in line with the repo rate will however only come into effect on the first day of the second month following the month that the new repo rate was announced.
It is however important to note that the prevailing rate on the date on which payment of a debt became due or the date when payment was demanded will be the rate applicable to the debt for the full period that the debt is in existence (until the debt is settled).
At this point your thoughts are probably, what does this have to do with me and how will it affect me? Let’s have a look at a practical example.
If you incur a debt with a creditor which debt is not governed by another law such as the National Credit Act or if the rate of interest has not specifically been agreed upon, the Prescribed Interest Rate Act will apply. Thus if one of your debts became due and payable after 1 March 2016, the applicable repo rate would be 6.75% and therefore the prescribed interest rate would be 10.25% per annum for the remainder of the period that the debt is due. Should the aforesaid debt however have arisen on 6 January 2016, the applicable prescribed interest rate would only be 9% per annum.
The unfortunate reality is that this aspect of credit transactions only come under the microscope when claims are instituted or are being defended and at this point it is already too late to negotiate the terms. In conclusion it is therefore advisable for both debtors and creditors to carefully consider the terms of an agreement, verbal or written, regarding the applicable rate of interest before same is signed or confirmed as a small change in the interest rate can have a major effect on the total amount due.