The Prescribed Rate of Interest Act, No. 55 of 1975 (“the Act”) prescribes the maximum (and minimum) interest rate that a creditor can claim on interest-bearing debts in instances where an applicable interest rate has not been agreed by the parties contractually, or is not regulated by another law, or is not governed by a trade custom.
Previously the prescribed interest rate was 15.5% per annum, and a typical example of where this would find application was a judgment debt where one of the prayers in a summons would typically include “interest at 15.5% per annum from date of judgment”. This prescribed interest rate of 15.5% has however been lowered to 9% with effect from 1 August 2014. This means that all interest-bearing debts that started to bear interest on or after 1 August 2014 and which fall within the ambit of the Act, will bear interest at 9%. The amendment to the interest rate will not apply retrospectively and the rate applicable to debts that started bearing interest before 1 August 2014 will remain at 15.5%.
So let’s look at situations where the rate of 9% per annum will apply: A typical example would be where parties agreed to a date of repayment for a specific amount of money, and the party under the obligation to pay the agreed amount by the agreed date, then fails to pay in terms of the agreement – meaning that the debtor is “in default” or in “mora”. Another example where this “mora interest” will also apply is where parties didn’t agree on a date for repayment, but one party has demanded repayment from the other – thus putting the other “in mora”.
As the interest so charged is simple interest, one cannot compound the interest annually (i.e charging interest on interest). The interest is simply calculated with regard to the original capital amount that was owed.
It is important to realise that this rate is a peremptory provision, which prescribes 9% (previously 15.5%) as both a minimum and a maximum, if the interest rate is not governed by other agreements or laws, and the debt was not intended to be interest-free. One must however remember that nothing prohibits parties from agreeing to a different rate contractually – provided that no other legislation regulates the specific agreement (an agreement in terms of the National Credit Act will be an example where another law regulates the applicable interest rate allowed).