CR246 Loans Interest limit in terms of in duplum rule

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CR246
Loans

Interest limit in terms of in duplum rule – loan on policy repaid in part – meaning in rule of “amount of unpaid loan”.

Background

A policyholder borrowed R9 000 from the insurer against his policy. The debt was subject to the in duplum rule (as the loan was made after 1 January 1999 when the rule became applicable to loans against insurance policies.)

The policyholder subsequently repaid a lump sum of R5 000 in respect of the loan. The policyholder complained to our office when interest on the outstanding balance exceeded R9 000.

The insurer advised that the R5 000 had been credited to accrued interest in the sum of R1 804,53 and that the remaining R3 195,47 was used to reduce the loan amount to R6 744. The insurer contended that R15 744,38 was the limit to which the debt could grow, in other words the interest could run to R9 000.

We agreed with the insurer that in the absence of an agreement to the contrary, it was entitled to apply the R5 000 to interest before applying it to capital. The in duplum rule states, however, that interest stops running when it reaches the amount of the unpaid loan which means that arrear interest cannot run to an amount greater than the capital amount of the outstanding loan.

Discussion

In our opinion the balance of the unpaid loan, R6 744,38, would therefore be the new limit for interest accumulation, not the R9 000 of the original loan.

This interpretation was supported by case law. In Commercial Bank of Zimbabwe v MM Builders & Suppliers (PVT) Ltd 1997 (2) SA 285 (ZHC) at 298 Gillespie J stated that:

“… the question is whether the interest accrues until it reaches the amount of the capital originally advanced or whether, in the event of reduction of the capital by partial payments, it accrues only to the amount of the capital outstanding. The all-embracing manner of formulation of the rule from Roman times, usurae non currunt ultra duplum and ultra sortis summam usurae non exiguntur, is not such as to suggest that where payment of part of the capital has been made nevertheless there remains a notional principal sum to which interest may accrue no matter what the true capital outstanding. Where both Nathan and Niekerk’s case have formulated the rule on the basis that the limit beyond which interest ceases to accrue is the unpaid capital, or the amount of capital upon which judgment is obtained, that formulation seems correct.”

We requested the insurer to reconsider its stance. It agreed to do so, and reduced the interest to accord with the balance of the amount of the loan debt, R6 744,38 .

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