Early termination of credit agreements is a common occurrence in the credit market. Accordingly, Consumers should be aware of the correct processes and procedures which must be complied with when they are desirous of early termination of the credit agreement. In the same breath, Credit Providers must be aware of their rights more importantly when the Consumer is seeking to determine whether the early termination is justified or prejudicial to the Credit Provider in terms of the National Credit Act 34 of 2005 (“the NCA”).

Right to Rescind versus Surrender of Goods

Many Credit Providers, and Consumers, are not aware that there are four (4) possibilities for early termination of a credit agreement in terms of the NCA, namely, right to rescind (cooling-off right), early settlement, surrender of goods and early payment. For purposes of this article, we will focus on two of these possibilities for early termination, namely the right to rescind (cooling-off period) and surrender of goods. The four main difference between these two types of early terminations concern the applicability, expiry, place of conclusion and restitution.

Applicability

With regards to applicability, in the circumstances where the Consumer exercises his/her right to rescind, the right is only available to Consumers who conclude a lease agreement or an instalment agreement (for moveable goods). The converse applies to instalments agreements, leases and secured loan (for moveable goods).

Expiry

The right to rescind, also known as the cooling-off right, is only valid for five (5) business days from the conclusion of the agreement, after which the right is forfeited. A written notice needs to be served on the Credit Provider by hand or fax or email or registered mail if the Consumer wishes to enforce his/her right. Surrender of goods, on the contrary, does not expire and termination has to be accompanied by a written notice of intention to cancel.

Place of conclusion

In terms of the right to rescind, the conclusion of the credit agreement must occur at any location other than the business premises of the Credit Provider, unlike the surrender of goods which applies regardless of where the agreement is concluded.

Restitution

A right to rescind when exercised, it entitles the Consumer to full restitution. The surrender of goods, restitution insofar as the value of goods exceeds the outstanding balance.

Does early termination constitute a breach?

Early termination of a credit agreement will prejudice the Credit Provider and cost him/her interest, as interest is levied according to time. In certain circumstances, especially when the debt is in favour of a Credit Provider, the Consumer may only terminate that agreement in advance with the consent of the Credit Provider.

Since the right to rescind is a Consumer’s statutory right to cancel, the termination of the agreement does not constitute a breach, and the Consumer does not have to provide any justification.

Upon the date of surrender, goods must be valued (the onus is on the Credit Provider to ensure this is done). The Credit Provider must be informed of the value of the goods. If goods are surrendered, the Credit Provider must liquidate the goods, and if the proceeds exceed the outstanding balance (including interest and fees on the date of surrender) in terms of the agreement, the balance must be remitted to the Consumer.

If the proceeds fail to make up the outstanding balance, the Credit Provider must request the Consumer to pay the shortfall; if the Consumer does not pay voluntarily, summons may be issued against him/her.

If the Consumer is not already in default of payment, he/she can elect to halt the surrender once he/she has been informed of the value of the goods, or he/she can elect to continue. If the Consumer is already in default, he/she may not elect to halt the process if surrendering.

Consumers and Credit Providers are urged to be aware of the correct processes and procedures in exercising their rights for early termination in compliance with the Act. Consumers should also ensure that when they exercise their rights, service providers suffer little to no prejudice as a result of early termination.

@Petrus Khumalo, SchoemanLaw Inc.

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