Hire Purchase Contracts

This Topic Includes:
Laws applying to a hire purchase
How hire purchase works
Advertising hire purchase offers
Credit criteria
The hire purchase contract
Insurance
Customer's right to cancel
Customer change of circumstances
Faulty goods on hire purchase
Frequently asked questions

Hire purchase is a form of credit. The customer agrees to buy goods from you and to pay for those goods in instalments. The customer has the right to possess and use the goods from the time the contract is made. You or the finance company have a security interest in the goods until all amounts owing by the customer are paid.

Rental or lease agreements are hire purchase contracts where the customer hires the goods with an option to purchase.

Law change from 1 April 2005

From 1 April 2005, the Credit Contracts and Consumer Finance Act will apply to all new "credit sale" contracts.  "Credit sale" is the new term for agreements formerly called hire purchase or conditional sale agreements.  For more information on credit sales and the new Act, visit the Credit Contracts and Consumer Finance Act section of Business Information.

Laws applying to a hire purchase

Hire purchase sales must comply with the Hire Purchase Act. 

Where a customer is paying more than the cash price of goods (eg, with interest added), the sale must also comply with the Credit Contracts Act. 

Where the customer fails to pay their instalments or puts the goods at risk, the finance company or you as the seller must comply with the Credit (Repossession) Act if the goods are "consumer goods" (if the goods are not "consumer goods" then the Personal Property Securities Act will apply). 

Sale of goods on hire purchase are also subject to the Fair Trading Act and the Consumer Guarantees Act. 

All these Acts can be accessed at the government legislation website (there is no charge for browsing legislation on this site).

Credit Contracts Act 1981

The Act covers loan and hire purchase contracts which have a value not exceeding $250,000. If the customer has several loans with the same finance company the $250,000 rule will apply to the total of those loans. There must be a charge for providing the credit (e.g., the amount repaid by the customer must exceed the cash price of the goods).

The Act sets out information that must be in the contract (the rules about disclosure).

You must state (disclose):

• the cash price of the goods
• the amount of credit
• the total cost of credit
• the finance rate
• name and address of the creditor
• the rate, frequency, and number of instalments, when payment is due, and who payment is made to
• the right to cancel within three working days, and
• all other terms of the contract.

The Act also sets out the penalties for failure to disclose.

Hire Purchase Act 1971

The Act sets out:

• the requirement to provide a hire purchase contract in writing
• the particular format for that contract
• rules for assigning a hire purchase
• rules for early settlement of the contract
• rules for variations to the contract.

Other laws that impact on HP sales:

Privacy Act 1993

The Privacy Act applies to every person or organisation in New Zealand in respect of personal information held in any capacity other than for the purposes of their personal, family, or household affairs.

The Act controls how agencies collect, use, disclose, store, and give access to personal information.

The Act uses the term "agency" to describe individuals and organisations covered by the Information Privacy Principles (IPPs). As a retailer it is more than likely you will be covered by the Act. Therefore you must adhere to the Act.

For more information on the Privacy Act, visit the Privacy Commission site.

Human Rights Act 1993

The purpose of the Human Rights Act is to help ensure that people are treated fairly in a number of areas of public life. If a person believes they have been discriminated against, they can ask the Human Rights Commission for assistance.

The Human Rights Act makes it unlawful to discriminate against someone on the grounds of sex, marital status, religious or ethical belief, race, colour, national or ethnic origins, age, disability, political opinion, employment status (receiving a benefit or ACC), family status or sexual orientation. Discrimination is unlawful whether it is direct or indirect.

The Act specifically provides for discrimination in credit matters. Credit matters are 'facilities' under the definition of goods, services and facilities. Facilities include 'facilities by way of banking or insurance for grants, loans, credit, or finance'.

It is unlawful to refuse to provide credit, or treat anyone less favourably in connection with the provision of credit by reason of any prohibited grounds of discrimination. There are no special exemptions for the granting of credit (unlike insurance which can be offered on different terms on grounds of sex, disability or age, where this is reasonable). However there may be a defence of "good reason" for any practice which is indirectly discriminatory.

For more information on the Human Rights Act contact the Human Rights Commission.

How hire purchase works

When a customer buys goods on hire purchase there are three parties involved:

1. the customer - who buys the goods
2. the retailer - who sells the goods
3. the finance company - who provides the finance.

You make the initial agreement with the customer. Once the security agreement has been signed you are likely to assign the agreement (including your security interest in the goods) to the finance company. The customer makes payments to the finance company. Whether the security interest will revert back to you will depend on the terms and conditions of your agreement with the finance company.

Is your agreement with the finance company "recourse" or "non-recourse" ?

Your agreement with the finance company will make it clear whether you or the finance company will take responsibility for:

• credit assessment
• collecting payments
• faulty goods
• representations made about goods or credit
• handling repossession
• selling repossessed goods
• pursuing debtors.

If you have a recourse agreement then the finance company will have recourse to you if the customer fails to pay the debt. You may be required to partially perform the credit assessment of your customer and will be responsible for carrying out repossession and recovering any debt from the customer if they default on their payments.

If you have a non-recourse agreement the finance company may have no recourse to you if the customer fails to pay the debt unless you fail to carry out the instructions of the finance company - e.g. the finance company may request that you verify some details about the customer at point of sale.

The finance company will assess the risk of the customer. You will not be responsible for repossessing the goods and recovering the debt if the customer fails to pay.

Be sure

Under either type of agreement the finance company is likely to have recourse to you in terms of the quality of the goods and any statements or information provided to the customer about the goods or the credit by your sales staff.

Check your contract with the finance company. Make sure you understand your responsibilities to the finance company and to the customer.

Advertising hire purchase offers

The Fair Trading Act 1986 prohibits misleading and deceptive conduct and false representations when supplying goods and services. Any representations about the goods or the hire purchase contract are covered by the Fair Trading Act.

Examples of actions that may breach the Fair Trading Act

• Advertising "no deposit" hire purchase deals without disclosing that the offer is only available to customers who meet your credit criteria.
• Sales staff inform a customer that hire purchase is available before the mandatory credit check is run. The customer is then declined the hire purchase by the finance company.
• Advertising by reference to instalment payments without mentioning a balloon payment or deposit.
• Breaching the Act may result in a fine up to $30,000 in the case of a person, and up to $100,000 in the case of a body corporate. However, any person can take civil action under the Act to seek compensation where a loss has been suffered as a result of receiving misleading or false information.

The Commerce Commission enforces the Fair Trading Act.

Credit Contracts Act 1981

The Credit Contracts Act contains rules concerning credit advertising. Breaching this Act may result in a fine up to $5,000.

The Act states that "where an advertisement states the interest rate, it must also state the finance rate if it is possible to calculate it at the time".

Recommendations for advertising

• Your advertisement shows the amount payable and the period the amount is payable over.
• Your advertisement makes it clear to the customer when credit criteria approval is necessary in order to buy using hire purchase.
• Your advertisement makes it clear when a "no deposit" promotion is only available to customers who are a good credit record risk.
• You are careful when offering goods interest free. The price of the goods being offered interest free must be the same as the cash price for the goods.
• If you are offering a free gift with a hire purchase sale, clearly state any conditions in respect of the gift. For example - gifts only available on white ware sold before 1/5/2002.
• Small print does not qualify or limit the main offer in your advertisement. Be careful about using terms such as "special conditions apply" to limit or change what is in your advert.

Credit criteria

A credit provider is free to decide on the criteria a customer must meet before granting credit approval.

The criteria are likely to include:

• the buyer's previous credit history
• their ability to pay
• their current income
• whether they have any other outstanding debt payable at the present time.

You or the finance company may require customers without a credit history, or who are new customers, to complete a credit application and provide information about employment and other relevant financial circumstances.

Providing credit criteria to minors

The Minors Contracts Act makes contracts entered into by people under 18 (unless married) unenforceable unless a Court rules the contract is fair and reasonable. Finance companies want enforceable contracts so they may require a co-borrower (a person who enters into the contract jointly with the customer) to be provided.

A guarantor or co-borrower (often a parent) may also be required because young adults are unlikely to have a prior credit history and may have just started in full time employment.

Acting as a guarantor

A finance company may require a guarantor where:

• the debtor is not an acceptable risk
• the debtor does not meet the finance company's lending criteria - eg, the debtor is a minor.

A person acting as a guarantor must sign a guarantee agreement in writing. A guarantor is not just providing a credit reference for the purchaser. They can be held liable for the debt if the customer defaults on the agreement. A copy of the guarantee and the hire purchase agreement (the disclosure documents) must be given to the guarantor.

The Credit Contracts Act requires you to disclose information to guarantors about the nature of the guarantee:

• information about the contract or loan that was disclosed to the debtor (eg, finance rate, instalments).
• Failure to disclose the correct information may result in penalties against you or the financier.

Can I still offer hire purchase if the customer is turned down for credit by the finance company?

If you have a recourse agreement with the finance company you may be liable for the debt in the event that the customer defaults. You may choose to provide the customer with credit and place your own conditions on the sale to limit risk - eg, having a guarantor, or asking for a larger deposit to be paid.

Hire purchase contract

A hire purchase contract must be in writing, be signed by the customer, the guarantor (if there is one) and the retailer, and disclose:

• a description of the goods
• the name and address of the finance company
• financial details of the contract
• the number of instalments
• the amount of each instalment
• when, where, and to whom each instalment is to be paid.

A customer must be given a copy of the contract within 10 days after the day the contract was made. Failure to provide a copy of the contract within the specified time may result in the extinguishment of the cost of credit.

What if the customer wants another copy of their hire purchase contract?

The customer should request a copy of the contract from the finance company. You, or the finance company, may reserve the right to charge a fee for this service.

Information to be shown on the sales docket

If you are unable to provide a copy of the hire purchase contract straight away you must provide a sales docket with the following information:

• name and address of seller
• name and address of buyer
• description of goods
• cash price
• total amount payable
• amount of deposit
• balance payable
• information on the manner in which that balance is to be paid, i.e. number of instalments and amount of instalments.

Advice to purchasers

The advice to purchasers must form part of the hire purchase contract. The advice covers the customer's right to a copy of the hire purchase contract, rebate and assignment entitlements and what to do if the finance company or the seller is acting unfairly. We recommend you explain clearly to the customer the terms of the hire purchase contract, e.g:

• the amount of deposit required
• the interest and finance rate
• whether the customer pays weekly, or fortnightly and the minimum amount payable in each instalment
• how long the hire purchase is for
• what will happen if payments are not made
• who payments should be made to if there is no automatic payment facility.

During the period of the hire purchase the customer must maintain the goods and keep them safe. The customer may not lease, rent, gift, dispose of, or remove the goods from the named premises until full payment has been made.

HP contract checklist

Before giving a copy of the hire purchase contract to the customer we recommend that you work through this checklist first:

• Have all the parties to the contract signed it?
• Are details of all the parties correct?
• Do the figures add up?
• Have I correctly calculated the finance rate?
• Have I described the goods accurately?
• Has the customer read the Statement of Rights?
• If an Automatic Payment is to be set up - have I checked that the account number and the final payment date is correct?

Insurance

The most common types of insurance required on a hire purchase contract are "risk insurance" and payment insurance.

You can require that a customer takes out some form of insurance over either the goods or the payments under the hire purchase contract.

Risk insurance

Commonly a hire purchase contract will require customers to insure goods for theft, loss, or damage as the goods remain your or the finance company's property until all payments are made.

If a customer has household insurance they may not wish to buy separate insurance for the goods. If you insist on the customer having additional and separate insurance for the goods this may be deemed "oppressive".

If a customer agrees to separate insurance cover, the insurer must be independent of both your company and the finance company.

If a customer does not have insurance and the goods are lost, stolen or damaged, they will have to keep paying for the goods. It is the customer's responsibility to take care of the goods while they are on hire purchase.

We recommend:

• that you do not insist that the customer takes out further risk insurance if the customer has adequate risk insurance that will cover the type of goods being purchased
• that you could require a certificate from the customer's own insurer that the goods on hire purchase will be covered by the customer's existing cover.

Consumer protection insurance (CPI)

Often called consumer credit insurance, consumer debt insurance, or payment protection plan.

It is an insurance policy that covers the customer's hire purchase payments for a time if they lose their income through illness, accident, death, or redundancy. If the customer cannot make their hire purchase payments for one of these reasons, the payments will be made by the insurance company.

The terms and conditions of such a contract will vary depending on the insurance company.

We recommend:

• that you allow the customer to see a copy of the insurance contract before signing the hire purchase contract
• that you ensure the customer is aware of their obligations under such insurance, and that the policy is of value to them e.g. people who receive benefits may not want or need CPI if it only covers them if they are made redundant.
• that you ensure that the information you are providing about the insurance is not misleading.

Customer's right to cancel

Three working day right of cancellation

The Credit Contracts Act gives the customer the right to cancel within a limited time after purchase and requires that a statement of rights about cancellation must appear on the hire purchase contract in a prominent position. Any cancellation under this right must be in writing.

If the customer has taken possession of the goods they have three working days from the day they receive the copy of the contract or the sales docket to cancel the credit part of the contract. The customer still has to buy the goods. They have 15 working days to pay the cash price for the goods from the day they give notice of cancellation

eg, Dan buys a side-by-side fridge/freezer set for his new kitchen. However he arranges to have to goods placed in storage because his new kitchen has not been finished. An hour after the goods are taken by courier to the storage facility he contacts you to cancel the sale.

Dan may argue that he hasn't actually got possession. Not having possession would entitle him to cancel the entire contract. But Dan, not the seller, arranged to have the goods put into a storage facility. Therefore possession has passed to Dan. Dan can only cancel the credit portion of his contract.

If the customer has not taken possession of the goods they have three working days to cancel the whole hire purchase contract - the credit, and the contract to buy the goods

eg, Steve sees a great lounge suite for sale in the window of a furniture store on a Tuesday afternoon. He enters into a hire purchase contract to buy it on the same day. He assumes he can get delivery of the goods straight-away as he has bought stock from the floor. But the store will not let him have the goods until they change their window display next Monday.

Steve has not taken possession of the goods. If Steve wants to cancel within the specified three working days, he is entitled to cancel the whole contract.

Recovering costs

In either case where the contract is cancelled the seller can recover costs relating to preparing the goods for sale, and in preparing the credit contract. If the customer only cancels the credit part of the contract, the customer can be charged interest for the period from the day the customer received the goods until the day the goods are paid for in cash,

eg, Joey has bought a personal computer from you and asks you to install a modem in it. If Joey then cancels the contract (within three working days) you can recover the cost of installing the modem.

Cancellation apart from the "three working days" right

There may be other rights of cancellation available to a customer in addition to the three working day cancellation period.

The customer may be able to cancel:

• the hire purchase contract at any time if you have not provided initial disclosure (see Credit Contracts Act above and the penalties and rebates section).
• where your store chooses to offers a "right of return" guarantee if a customer changes their mind
• under the Consumer Guarantees Act 1993 where the goods are substantially faulty or don't match the sample or description they were sold with or are unsafe
• where goods were sold at the customer's door. These sales, if made on credit, are subject to the Door to Door Sales Act 1967 which provides a seven day cooling off period.

Customer's right to cancel after the three day cancellation period

It is your choice whether you offer a refund or any other remedy if a customer has simply changed their mind or decided they can't afford the goods after the three day cancellation period has expired.

Customer change of circumstances

Customer changes address

It is the customer's responsibility to inform you and the finance company if they have changed address. They must do this because either you or the finance company have a security interest in the goods and are entitled to know where the goods are while the hire purchase is still being paid.

If the customer advises you of a change, note it down in writing and attach it to the customer's file.

Customer with joint hire purchase contract separates from co-borrower

If a couple have both signed their hire purchase contract they are each liable for the debt either in part (called several liability)

eg, Both Tony and Tina can be separately held liable for half the debt. This means when they decide separate, Tony may agree to have the bed and to continue to make the payments. If Tony stops paying, Tina can only be pursued for half the amount.

OR

in whole (called joint liability or joint and several)

eg, Both Tony and Tina are liable for the debt equally. Tina has made payments up to half the amount owing. She makes an agreement with the finance company to be severed from the contract. The creditor can only pursue Tony for the remainder owing.

Customer defaulting on payments

It is important to advise a customer to contact the finance company immediately if they are having difficulty meeting their payments. The options they should be informed of are:

Re-arranging repayments

The finance company may agree to spread the payments over a longer period.

For the customer this will mean:

• the total amount they pay will increase as more interest will be charged
• the term of the contract will be lengthened
• the amount of each instalment may reduce.

The customer needs to consider if they can meet the re-adjusted payments.

Any variation to the contract must:

• be in writing
• state the date on which the variation is made
• state the amount of money then owing under the hire purchase contract, whether or not it is increased or reduced
• state the date for payment of any instalment if altered by the variation
• be given to the customer.

Assigning the hire purchase contract

This is a right to transfer the customer's rights and obligations under the contract to another person (the assignee).

A customer may assign their right, title, and interest absolutely under a hire purchase contract. You or the finance company may not unreasonably withhold consent to such an assignment.

The assignment must be in writing and must set out the name, address, and occupation of the person to whom the interest is assigned.

A copy of the notice must be delivered to the customer within seven days and must be agreed to by the customer, the finance company, and the person introduced to take over the contract.

Unless otherwise agreed by you or the finance company, a customer and any guarantor may continue to be personally liable under the hire purchase contract. The assignee will become personally liable for all the customer's obligations.

Voluntary return of the goods (voluntary repossession)

A customer may have the right to terminate a hire purchase contract by returning the goods either in accordance with a term in the contract or with your or the finance company's consent. This is sometimes called a voluntary repossession.

We recommend that you explain to the customer that they will be liable for any amount owing after the proceeds from the sale of the goods are applied to the amount outstanding on the contract.

The effect of terminating the contract by voluntary return of the goods is substantially the same as if the goods had been repossessed by you. Therefore you will have to adhere to the rules set out in the Credit (Repossession) Act 1997 (or the Personal Property Securities Act 1999, if the goods are not consumer goods) (These links will take you to Leglisation.govt.nz where Acts can be read for free).

Some Exceptions

You may not have to treat a voluntary return as if it were a repossession in accordance with the Credit (Repossession) Act if

the contract entitles you to recover a smaller amount than the post possession provisions in the Credit (Repossession) Act. In this case you are limited to that smaller amount.

you regard the goods as having a value of at least 80% of the cash price. If this happens you have 14 days to provide the customer with a statement showing what they owe, or what their refund is.

prior to the goods being returned, you and/or the finance company have entered into a written contract with the customer providing for the return of the goods, and the customer has waived their post-possession rights. But the customer must have had, before making the contract for the voluntary return of the goods, "competent and independent advice as to the legal implications of that contract".

When goods are voluntarily returned you may not have the right to charge costs for physically repossessing the goods unless the customer requires you to collect the goods

eg, The customer has bought a king-size bed and is unable to deliver the bed back to the retailer.

But post repossession costs such as preparing the goods for sale will still apply.

The notice sent after possession and the statement of account after sale both indicate costs that can be recovered.

Faulty goods and hire purchase

The Consumer Guarantees Act sets guarantees or minimum standards that must be met for goods and services normally bought for household, domestic, or personal use.

Who does the customer claim from?

The customer may claim from you or from the manufacturer of the goods. The right to seek redress from you will remain even where you have assigned the hire purchase contract to the finance company. If the goods have a serious fault, the customer may choose a refund of any money paid, or any other consideration provided (eg, trade-in) in respect of the rejected goods.

We recommend...

that you advise the customer to keep the finance company informed of the problems with the goods that have been brought to your attention. Customers should not be advised to stop making hire purchase payments as this could lead to the goods being repossessed.

What if the customer hasn't completed payment for the goods yet?

If the customer has chosen to reject the goods you will have to advise the finance company that the hire purchase contract should be cancelled and any of the customer's further obligations are extinguished. The amount paid to date by the customer on the hire purchase must be refunded. Depending on the nature of your agreement with the finance company you may have to pay any outstanding amount owed to the finance company.

Frequently asked questions

How does a hire purchase differ from a layby?

In a "layby" the goods remain with the retailer until full payment is made. and the risk over the goods remains with the retailer. In a hire purchase the customer takes possession of the goods and the risk passes to the customer.

How does a hire purchase differ from a loan?

In a loan agreement the creditor provides money to the borrower. The borrower is normally free to choose what to do with the money. The loan can be provided with or without security.

For a secured loan, property used as security is listed on the agreement. This agreement is called a security agreement. This will allow the finance company to seize the security if the borrower defaults.

In a hire purchase the borrower is a purchaser of goods. The goods themselves provide security as the finance company has a security interest in the goods until they are paid for in full.

What if a customer wants to add another purchase to the account at a later date?

A new hire purchase contract must be made for any additional goods purchased. You or the finance company are free to decide whether one account number will be used for two hire purchases, and whether one single payment can be made towards two accounts.

What if the customer thinks there are unfair terms in the contract?

The Credit Contracts Act gives the Disputes Tribunal and the Courts the power to re-open oppressive credit contracts. The legal definition of oppressive is "harsh, unjustly burdensome, unconscionable or in contravention of reasonable standards of commercial practice".

eg, a contract that requires the customer to pay instalments in person, in cash, and only on a Friday before noon, with no alternative payment scheme available, may be considered a contravention of reasonable business standards as many hire purchase contracts can be paid in cash or by automatic payment.

eg, a very high finance rate will not automatically mean the contract is oppressive unless it could be shown that it was a contravention of commercial practice in that market for that particular customer.

There is no specific legislation that sets a limit for the rate of interest that can be charged on a loan or hire purchase.