A question that often comes up is, “My mom lent me quite a large sum of money. Can I include this loan in my debt review application?”

This isn’t as simple a question to answer as it may seem. The first question we need to ask is, “Was the transaction done at arm’s length?” We discussed “arm’s length” in our previous article, but let’s see what the National Credit Act says about transactions done between family members.

“…A credit agreement between natural persons who are in a familial relationship and –

• Are co-dependent on each other, or
• One is dependent upon the other.”

Based on this we can see that family members are not dealing at arm’s length. But, as mentioned in our previous article, if the family members are acting in their own best interest, for instance, charging interest on the loan, then the loan qualifies as “at arm’s length.”

But then the question arises, “Was your family member required to register as a credit provider?”

The Act has two conditions applicable to credit providers:

1. A person must apply to be registered as a credit provider if they (alone or in conjunction with other “persons”) provide credit to at least 100 credit agreements, or
2. If the principal debt owed under all outstanding credit agreements, other than incidental credit agreements, exceeds the threshold. Currently, this threshold is set at R500 000.

Here’s the cliff notes version.

You must register as a credit provider if:

• you have lent money to at least 100 people or
• if you have lent at least R500 000 to any one person or in total.

If you don’t register, then you may not offer, make available, or enter into a credit agreement with any person.

So, getting back to the question posed at the beginning of this article, “Can I include this loan in my debt review application?” To answer that, we need to ask three questions:

“Was the loan made at arm’s length?”

Assuming that interest was charged, even if it was at a favourable rate, then yes it was done at arm’s length.

“Was the loan amount more than R500 000?”

If yes, then the mom should have registered as a credit provider. This is still a credit agreement, but the mom is in breach of the Act which makes the credit agreement unlawful. We will cover unlawful agreements in another article.

“If the loan was for less than R500 000, does it still qualify as a credit agreement?”

While only certain credit providers are required to register with the National Credit Regulator, all credit providers are obliged to comply with the Act. The Act has been set in place to protect all natural persons and certain small businesses when they are entering into a credit agreement.

In Conclusion

Most credit providers need to register with the National Credit Regulator. This means that all their documentation should reflect a registration number. The same applies to debt counsellors. They too must be registered with the National Credit Regulator.

And lastly, be wary when lending money between family members, especially when it comes to large amounts. You might just burn your fingers