It is always in every person’s best interest to save money. This is important because change may happen at times you least expect it. Emergencies, accidents, unanticipated expenses will sometimes occur, and often these can be very costly.

The lack of savings compels individuals to borrow money at a cost. It is therefore inevitable that at some point customers will take up credit. This credit could be for the purchase of a car or home, payment for education, pay medical bills, or to finance a business venture. For one to get a loan with a bank, there first must be a credit agreement, also known as a contract, in place. This article focuses on the characteristics of Credit or Loan Agreements or Contracts.

What is a Credit/ Loan Agreement/Contract?

In the context of a bank, a loan agreement is a legal document that details the terms and conditions of the business relationship being established between the bank (lender) and the borrower (customer). Such agreements are used whenever a bank extends a loan to a customer and contain information regarding the terms and conditions under which the loan is granted.  The Central Bank of Eswatini (CBE) issued a Guideline on Banking Practice, as well as a Guideline on Key Facts Statements which banks must comply with amongst which include terms of their loan agreements. Steps which each party may take if the other party fails to meet the commitments are also enshrined in the agreement. The agreement must also adhere to the provisions of the Consumer Credit Act (CCA), 2021 (as amended).

Definitions

Before reviewing the provisions of a loan agreement, a borrower should make sure they understand the meaning of terms used in the agreement. These are usually provided under the ‘Definitions’ section of the agreement, but they can be also found throughout the contract. The Guideline on Banking Practice and the CCA requires that banks use plain, or simple language that is easy to understand. Customers should always ask for clarifications where they do not understand.

Terms and Conditions

Loan agreements may contain a section of what is termed as conditions precedent. These are conditions that must be met before the agreement becomes legally binding, placing an obligation on both the lender and borrower and before the lender is required to disburse the committed funds. Although in most cases conditions precedent is in relation to the borrower, there may be requirements on the part of the lender, for instance, where the lender should provide certain documentation.

Section 27 of the CCA outlines what could be classified as unlawful provisions in a credit agreement. For example, it is unlawful for a credit provider to have a condition that the consumer must leave his PIN or ATM card with the credit provider before he can access credit.

Terms and conditions must provide a fair and balanced articulation of the relationship between the borrower and the lender. Section 24 of the CCA stipulates that credit providers cannot enter into a credit agreement without first providing a quotation statement to the customer. This quotation statement is like the Key Facts Statement (KFS) that banks are required to provide to customers. The KFS outlines key terms and conditions of the loan, including the total cost that the customer will ultimately pay over the loan term. The customer is free to use the KFS to shop around and compare offers by other credit providers and then select what best works for him/her.

Amendment of the credit/ loan agreement

Section 53 of the CCA, 2021 (as amended) stipulates conditions under which an amendment of a credit agreement can be valid. The CBE Guideline on Banking Practice also stipulates that a bank should not change the terms and conditions of a loan contract without prior notification to the customer(s). There should be a written notice of at least five (5) days before any variation in terms and conditions which may affect fees, charges, and liabilities or obligations of customers take effect.

Interest rate

A loan accessed from a financial institution may carry either a fixed or floating interest rate.

Fixed rate – A fixed interest rate is one that remains the same over the loan tenure. The rate is fixed at the inception of the loan and does not vary. The primary advantage of a fixed rate is the borrower’s ability to secure a stable interest charge at a particular time.

Floating rate – This is also known as variable or adjustable rate – meaning the interest rate can change during the life of the loan. In most cases this is influenced by the interest rate as determined by the Monetary Policy Consultative Committee (MPCC) from time to time. The primary advantage of a floating rate loan to the borrower is that lenders generally charge lower initial interest rates than they do for fixed rate loans, while the primary demerit is that the borrower might have to make different payment amounts during the tenure of the loan, some of which may be quite significant. For credit agreements with a floating rate, banks are required to deliver to the customer a written notice not later than 30 days after the change in the interest rate by the MPCC as prescribed under the CBE Guideline on Banking Practice.

Contract length and duration

The length of a credit / loan contract is determined by a lender’s reliance upon an amortization (also known as repayment) schedule that lists each regular payment for the duration of the loan over time.  This indicates the portion of each payment that is allocated towards the principal balance and interest. Once the lender and the borrower have determined the amount of money needed, the lender will use the amortization table to calculate what the monthly payment will be by dividing the number of payments to be made and adding the interest onto the monthly payment.

It is always to the customer’s advantage to pay-off the loan earlier than the agreed repayment period as the customer is then able off-set some of the interest charges. Customers are entitled to one loan statement every month as prescribed under the CCA. Based on this, the customer should always request for a copy of the loan statement from the credit provider if it has not been provided and then verify if all payments made are being correctly allocated.

Penalties for default

In terms of Section 39 (10 (f) of the CCA, if a credit agreement/ loan contract is not paid in terms of the agreed terms, the loan is considered to be in default and the customer becomes liable for default administration charges. The borrower can also be liable for a myriad of potential legal damages to compensate the lender for any losses suffered. That is, where the defaulted lender then pursues litigation from a court of law to hold the borrower liable for legal costs, liquidation damages. Assets and property may also be attached or sold for repayment of the debt. In addition, a breach or default of court judgment can be placed on the borrower’s credit record. Notwithstanding the above, consumers should also be aware that there are limits beyond which credit providers cannot continue charging the consumer even when in default. For example, the in duplum rule which is a common law rule which provides that interest on a debt will cease to run where the total amount of arrear interest has accrued to an amount equal to the outstanding principal indebtedness. This is also in line with Section 41(6) of the CCA.

Conclusion on what consumers should look out for in a Credit/ Loan Agreement?

Borrowers should note that once signed, the loan agreement becomes binding, and it is assumed that the borrower has read and understood the terms and conditions of the loan agreement. Therefore, borrowers must take time to read and understand the terms and conditions of the agreement before signing and committing themselves. Asking questions about anything that is not readily understood will help to avoid future misunderstandings. It is within the borrower’s right to request for a copy of the loan agreement and seek independent advice from a person of their choice before signing the loan agreement. Minimally, borrowers should be clear on the following:

1. The break-down of all applicable charges
2. Whether the quoted interest rate is weekly, monthly, or annual
3. Whether the interest is compounded or a simple interest rate
4. Whether the other charges are once-off or continuous
5. The level of the default/penalty rate for late payments and non-payments and
6. Where there is an insurance charge, the borrower has the right to opt for his/ her preferred insurer instead of the one suggested by the bank in accordance with Section 44 of the CCA.

It is understood that consumers may take up credit because there is a pressing requirement for money. It is however crucial that consumers exercise caution and read all the key terms and conditions of the agreement. This will ensure that they do not end up taking up credit that is not suitable for their circumstances and ability to repay the loan.

To get  a copy of the Consumer Credit Act (CCA), 2021 (as amended) or updated Monetary Policy Consultative Committee (MPCC) stances, visit the CBE website on www.centralbank.org.sz. For more information, contact the CBE Communication Office at 2408 2280 or send an email to info@centralbank.org.sz.