The decision as to whether or not you can levy penalty interest on your late payers is not as simple as it may first appear. We often get legal advice from friends who aren’t lawyers, which leads us to believe that the way we are doing our business is the right way. Here’s what you need to know when you charge or agree to interest:

If your debtor is in default, interest can be claimed:

- from the date of summons; or

- from the due date for payment, but only if there is an agreement to pay interest.

Compound interest can only be claimed if there is an agreement for compound interest. If there is no agreement, then only simple interest can be claimed.

Interest should be paid at the rate that was agreed upon between the parties. If you have failed to meet this criteria for paying interest, then interest must be calculated at the rate prescribed by s 1(2) of the Prescribed Rate of Interest Act 55 of 1975. This rate is currently 15,5% per annum.

The Usury Act of 1968 provided the rates that you should be paying. The Usury Act was repealed by the National Credit Act (“NCA”), with effect from 1 June 2006. In terms of the NCA, the maximum penalty interest that can be agreed to is 2% per month.

Interest stops running when the full amount has been paid, or when the unpaid interest equals the outstanding amount of the capital sum. This rule is referred to as the in duplum rule.

Protect yourself when you are doing business by ensuring your legal agreements properly cover you. Verbal agreements just aren’t good enough when it comes to money and it is necessary to know that you have a written contract when you are doing business.

Kerry Jack is an admitted attorney, and is the founder and co-owner of www.AgreementsOnline.co.za, South Africa’s leading source of legal agreements and documentation.