Reckless Lending: You Could Lose Everything

April 2026 | Credit Law

“One of the greatest disservices you can do a man is to lend him money that he can’t pay back.” (Jesse H. Jones, entrepreneur)

A recent High Court decision provides yet another cautionary tale for lenders. The stakes are high: get this wrong, and you could lose everything.

Two big risks for lenders

Before you lend, be aware of two major risks that you need to manage. Both are imposed by the National Credit Act (NCA):

1. Not registering as a credit provider: If you lend money without registering when you were required to do so, your agreement will be invalid and unenforceable. You will lose everything unless you can convince a court to make a “just and equitable” order allowing you at least a partial recovery. This is by no means guaranteed, so a risk not worth taking.

   As a general guideline, if your loan is made at “arm’s length” you will probably have to register. In contrast, loans not made at arm’s length – such as informal loans between family and friends, or between related companies in a group – may be excluded. But the rules are complex and our courts have had to wrestle with several borderline cases over the definition of “arm’s length”. There is no substitute for advice specific to your situation.

   Note that even a single qualifying loan, of any size, can trigger the requirement. The thresholds that previously limited it to commercial lenders and to larger loans fell away in 2014 and 2016 respectively.

2. Reckless lending: Let’s turn now to the second risk, which applies whether you are properly registered as a credit provider or not. We’ll illustrate it with a recent High Court decision in which a family trust’s lending was held to be reckless and therefore irrecoverable.

A family trust lends R430k to a heavily indebted couple

A SAPS employee and her husband, heavily indebted to a range of creditors, approached a debt consolidation business for help in 2012.

Having carried out its version of the credit assessment required by the NCA, the debt consolidator organised a lifeline for the couple in the form of a R430,000 loan from an investor (a family trust) to pay off their debts. The loan was secured primarily by a bond over the couple’s house in Kraaifontein. A secondary security in the form of a sale agreement by the couple to the trust was to be held in reserve and activated only in need. The idea was that, after a short period of financial rehabilitation, the borrowers would refinance the loan through a bank, but that never happened.

When the borrowers defaulted on their repayments, the trust sued for R430,000 plus interest (a lot of money at 17.1% p.a. for 10 years), and an order allowing it to sell the couple’s bonded house to satisfy the debt.

The Court declared the credit agreement “reckless credit” and set it aside. The trust must now write off the balance of its loan and interest, cancel its bond over the couple’s house, and pay all the legal costs. Its only consolation is that the Court, in exercising its discretion to structure a just and equitable solution between the parties, allowed the trust to keep the R251,325 already paid to it.

What went wrong?

Why did the lender lose so badly? In a nutshell, the affordability assessment performed by the debt consolidator was flawed. Instead of asking whether the couple could afford this loan based on their existing financial means (as required by the NCA), the assessment relied on “a risky potential of future funding”, i.e., the speculative prospect of a mainstream bank granting a further loan in the future. The borrowers had always been over-indebted, this new loan made their situation even worse, and therefore the lending was reckless.

Lenders: How to avoid a “reckless lending” declaration

NCA regulations in force since 2015 set out in detail the various technical criteria and formulae to be used in assessments. This is just an overview of what you need to cover:

• Perform a proper credit assessment: This is make-or-break. It is a specific and fundamental requirement of the NCA that you carry out a proper assessment before granting credit, and you must be able to prove that you did so with documentary backup if challenged.
• Confirm affordability: Assess income, expenses, and existing debt, verifying everything with proper salary slips, bank statements, etc. As we saw in the case above, affordability must be assessed on the borrower’s current “financial means, prospects and obligations”, not future hopes or prospects. You must establish the borrower’s “discretionary income” by subtracting from total income all monthly deductions, living expenses and the like, with reference to a table of “norms” set out in the regulations.
• Check repayment history: You must take into account the borrower’s debt repayment history under other credit agreements.
• Explain everything fully to the borrower: Make sure the borrower fully understands the structure of the loan, the total costs, obligations, and risks. Use plain, non-technical language to avoid any claims of confusion or deception.
• Avoid over-indebtedness: You must be able to show that the repayment plan is realistic and affordable to avoid a finding of over-indebtedness.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

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Lending to a Friend or Relative – When Must You Register as a Credit Provider?

April 2024 | Credit Law

“In life, we never lose friends, we only learn who the true ones are” (Unknown)

Lending money to a friend or family member in need sounds like a natural and informal sort of thing to do. But beware – if relations sour and your friend/relative can’t or won’t repay you, you may not be able to reclaim your money.

The danger is that, if you should have registered as a credit provider in terms of the NCA (National Credit Act) but didn’t, the loan would be an unlawful credit agreement and would therefore be void and unenforceable. You could even face penalties for non-compliance with the requirement to register.

Only “arm’s length” loans fall under the NCA

A recent Supreme Court of Appeal (SCA) case turned on the question of whether or not such a loan was conducted “at arm’s length”.

That’s critical, because only a loan given “at arm’s length” falls under the NCA. The question of what is and isn’t at arm’s length is a complex one, but the factors taken into account by the SCA in reaching its decision provide a good example of what will weigh with a court.

At stake – R15m, loaned informally to a friend on a handshake

• A R15m loan made by one businessman to another was “informal in nature which was sealed with a handshake, with no interest charged.” Later on, the debtor signed an AOD (Acknowledgment of Debt) for the R15m, granting a grace period of six months before interest would accrue on default. The lender had never registered as a credit provider.
• The High Court found both the loan agreement and the AOD were subject to the NCA and therefore unlawful.
• Fortunately for the lender, the SCA overturned this decision on appeal. On the facts, it held that the loan was not “at arm’s length” and therefore not subject to the NCA. Key factors it considered in reaching this decision were –
  • The loan agreement was oral and informal,
  • The parties had become friends and had “… formed a close bond in personal matters outside the realms of business. The loan was offered as a gesture of friendship”,
  • The lender did not normally lend money, and this was a one-time occurrence,
  • No interest was levied on the loan except on default and the lender had not “sought to obtain the utmost advantage from the transaction”.
• Bottom line – the lender can breathe a sigh of relief, the loan agreement and AOD are not void in terms of the NCA, and it can pursue the debtor for its R15m.

But – don’t take unnecessary chances!

Concluding an informal loan agreement with a handshake is all very well, but this could well have turned out badly for the lender, and R15m is a lot of money to lose for want of checking for lawfulness upfront.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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