The in duplum rule has its origins in our common law and is based on considerations of public policy and is designed to protect borrowers from exploitation by lenders. The purpose of the rule is to ensure that debtors don't find themselves in an inescapable financial bind in respect of repayment of debt. It also ensures that lenders don't allow the unrestrained accumulation of interest on outstanding debts.
In essence, the common law provides that the unpaid interest on a debt that is due, but has not yet been paid should not exceed the outstanding capital. As soon as the unpaid interest equals the outstanding capital, interest ceases to run.
Section 103(5) of the National Credit Act 34 of 2005 (the Act) now concisely codifies the in duplum rule in respect of credit agreements. However, it qualifies the common law in duplum rule. It limits the entire cost of credit that may accrue during a period of default to the unpaid balance of the principal debt.
Section 101(1)(b)-(g) of the Act provides that the cost of credit includes initiation fees, service fees, interest, credit insurance, default administration charges and collection costs.
The limitation imposed by section 103(5) on the cost of credit that might accrue during a period of default has a concerning consequence. Because the costs of collecting a debt is considered to be a component of the cost of credit, the legal costs that a credit provider will be able to recover from a consumer for having to enforce a debt could be limited significantly.
In National Credit Regulator v Nedbank Ltd & others (2009) JOL 24127 (GNP) it was held that section 103(5) adds an even further qualification to the common law in duplum rule.
Once the cost of credit equals the unpaid balance of the principal debt during a period of default, section 103(5) will operate and no further amounts will accrue. When a consumer thereafter makes a payment, common law dictates that such payment first be set off against the outstanding interest. The outstanding cost of credit will thus be reduced and no longer equal the unpaid balance of the principal debt, allowing for further costs of credit to accrue. However, the court held that no further interest may accrue in such a case because the consumer will still be in default and "indebtedness in respect of cost of credit cannot grow by more than the stated maximum".
Unfortunately, the court did not specifically indicate when a credit provider will again be able to charge the consumer. It is presumed that a credit provider may do so only once the default has been remedied.