Don’t bank on a lender letting your debt prescribe
Last week we zoomed in on the effects of compound interest and how great earning compound interest is. Paying it is where the real pain is. Most credit lines are compounding debt, and if you default and eventually stop paying altogether, you may find yourself in some serious trouble. Interest on abandoned debt can quickly accumulate to almost double the initial principal amount.
Of course, we have the in duplum rule in South Africa, but close to double is still huge. The in duplum rule states that interest on a debt will cease to run when the total amount of arrear interest has accrued to an amount equal to the outstanding principal debt.
But that is not the only legal weapon that consumers have against abandoned debt. We also have the Prescription Act. This places an obligation on both the consumer and credit provider. If both parties abandon the debt, then both must suffer the consequences.
In 2007 I was a student wet around the ears at Rhodes University. Like many students, I could not afford a personal computer, let alone a laptop. The university provided students like me with public student computer labs. Unwilling to accept my situation, I went out to a furniture shop looking to buy a laptop on credit.
I confidently walked into the shop, approached a sales consultant, and inquired about buying a laptop on credit. He helped me swiftly; within an hour, I walked out of the shop with my laptop in one hand and, unbeknown to me, my credit rating in another.
Six months later, my laptop was stolen out of the place I was staying in during the Grahamstown National Arts Festival. I was shattered, recalling that I had declined insurance on it.
A month later, I had made peace with the fact that my laptop was gone, albeit getting a rude reminder when R400 was debited from my account. I didn’t want to pay for something I no longer had and failed to comprehend that the obligation to service my credit agreement was still in full effect.
I needed a plan, so I did what I thought was clever at the time: I withdrew all my money from my bank account. The furniture shop tried for three months to debit my account, only to be met with no funds available. Eventually, they stopped.
Fast forward to 2015, when I applied for a car loan, only to find out how low my credit rating was. All that scheming I did in my varsity years was now costing me.
The bank consultant explained how credit scoring worked and why I was a risk for the bank and why it offered a high interest rate.
Amnesia started to fade as I remembered the laptop debt that I had abandoned. My non-payment messed up my credit rating so much that I would now pay it back through the high interest rate.
The following day, I requested a copy of my credit report, as I was sure that my laptop debt would be listed. To my shock, it was not. My debt had prescribed. I went back to the back to get clarity, as the debt wasn’t listed on my report. The lady explained that, because three years had elapsed, the debt became prescribed.
According to the Prescription Act, a debt prescribes if, during the past three years the consumer did not: admit to owing on the debt, either verbally or in writing; make a payment towards the outstanding amount; or the lender has not taken legal action against the consumer.
In other words, because I had abandoned payments, and the creditor too had left it, by not instituting any legal process against me, my laptop debt had prescribed.
While many may think that this is a way to avoid paying off debt, it is not. The havoc that non-payment of debt can cause to your credit rating is not worth it. However, the law protects consumers from the impending compounding of debt. Creditors have the right to approach the courts to get you to honour your credit agreements. However, they should do it within a reasonable time.
One last thing: not all debt is made equal. There are different prescription periods for different types of debt. Store accounts and gym contracts prescribe after three years. However, TV licenses, home loans and court judgment debts can take up to 30 years to prescribe.
Only take up debt you can afford to pay and ensure that you insure your debt once the credit agreement has been signed.
Nicolette Mashile is the co-host of the SABC1 talk show Daily Thetha, an actress on Generations and the founder of Financial Bunny, a financial literacy platform. She has recently written a book, What’s Your Move? A collection of ordinary financial lessons.