Hire Purchase Contracts - Penalties and Rebates

This Topic Includes:
Penalties
Early repayment rebates

Penalties

The Hire Purchase and Credit Contracts Acts require you to disclose certain information to customers and guarantors in respect of a hire purchase contract. Failure to disclose the correct information may result in penalties against you or the financier.

Hire Purchase Act penalties

If the hire purchase contract is not in the correct form or is not provided within the ten day time period specified, the cost of credit may be extinguished. However this does not apply if you can show that:

• the non-compliance was not of such a nature to mislead or deceive the customer to their prejudice; or
• that you remedied the non-compliance as soon as possible after it was discovered or brought to your notice; and
• that you have compensated or offered to compensate the customer.

If the hire purchase contract is not in writing and is not executed by the customer or the customer's proper representative, it will not be enforceable.

An unenforceable contract will prevent you or the finance company from repossessing goods if the purchaser is in default. It may also mean you will be prevented from collecting the cost of credit payable by the customer. The customer may only be required to pay the amount financed.

Credit Contracts Act penalties

If you or the finance company fail to provide information required under the Credit Contracts Act then:

• the contract will not be enforceable. This will prevent you or the finance company from repossessing goods if the purchaser is in default. The contract can become enforceable when correct disclosure is made.
• penalties equal to three times the amount of credit paid at the time the non-disclosure is discovered can apply. This penalty has a maximum equalling 24 months interest and charges. This penalty will still apply even after the correct disclosure is made.

These penalties are deducted at the end of the contract from the amount owed by the customer. This effectively shortens the hire purchase period and reduces the amount of interest to be paid.

Inadvertent non-disclosure

The Credit Contracts Act provides relief from a penalty if you make a mistake as long as you show:

• that the mistake was inadvertent or beyond your control, and
• correct disclosure was made as soon as possible after the error was discovered, and
• if the mistake relates to the finance rate and the correct rate is higher, you reduce the rate to the rate originally disclosed, and
• you or the finance company have compensated or offered to compensate for any loss or prejudice suffered by the customer as a result of the mistake.

Initial, modification, continuing, request and guarantee disclosures

Initial disclosure means a copy of the contract must be given to every debtor either before the contract is made or not later than the end of the 15th working day after the contract is made.

Modification disclosure is used where a change to the contract is made

eg, Many hire purchase contracts reserve the right to change payment dates with a time period for notifying the change. Such changes must be in writing under both the Hire Purchase Act and the Credit Contracts Act.

Continuing disclosure is used for revolving credit contracts such as credit cards and bank overdrafts where the amount of credit is not known or is indeterminate.

Request disclosure occurs when the customer asks for a copy of the contract. This is in addition to any copy of the contract correctly provided. You can charge for additional copies of the contract if this right is included in the contract.

Guarantee disclosure means disclosure to every guarantor under the guarantee of the guarantee and the credit contract.

Note: the contract can not be altered after the customer signs it without the customer's consent, except to enter details from a sales docket, or to correct clerical errors e.g. a spelling mistake.

Early repayment rebates

The Hire Purchase Act gives customers the right to complete the contract early. The customer will have been informed of this right in the Advice to Purchasers notice.

The rebate applies only to contracts where the cash price of the goods is less than $15,000. But it pays to check the contract because some finance companies choose to apply the rebate rule to goods over $15,000 in price.

Rebate rules

The Hire Purchase Act requires that a rebate is given on 9/10ths of the unpaid finance charges excluding insurance, maintenance or service charges for the full months remaining on the contract.

The rebate is calculated using a mathematical formula called the Rule of 78. The rule gets its name from adding 12+11+10+9+8+7+6+5+4+3+2+1=78.

Using the Rule of 78 means that more of the cost of credit is applied to the beginning of the contract than towards the end. This is similar to table mortgages.

eg, Tony and Tina have paid 12/78ths of the finance charges in the first month of a 12 month agreement. If they pay the contract off during the eighth month they will have four months of payments left.

Using the Rule of 78 we can calculate that Tony and Tina will have paid 68/78ths of the cost of credit to the end of the eighth month. This figure is reached by adding 12+11+10+9+8+7+6+5 = 68. This is transferred into a percentage figure equalling 87.18% of the cost of credit.

This leaves 10/78ths (add 4+3+2+1 = 10) of finance charges to still be paid or 12.82%.

Under the Hire Purchase Act rebate rules Tony and Tina only receive 9/10ths of the unpaid finance charges. So taking 10% from 12.82% (10% = 1.28) we get a final percentage of 11.54. You will see this figure in the rebate table which calculate the 9/10thspercentage figure for you.

Calculating rebates

Rebate for some of the cost of credit or finance charges:

Step 1

Add the finance charges such as interest, booking fees, and administration charges. This is the amount shown on the contract as the total cost of credit. Do not include insurance, maintenance or service charges.

eg, we know from the example above that Tony and Tina's hire purchase contract is being paid off in the eighth month.
Add the finance charges on Tony and Tina's contract:
Interest $172.30
Booking fee $ 30.00
Total $202.30

Step 2

Use the Rebate Table for Finance Charges to find out the percentage rebate.

eg, Tony and Tina's contract paid off during the eighth month still has four full months left to run. By using the chart we can see that the rebate percentage is 11.54%.

The calculation is made on the full months left to run. If Tony and Tina have paid their eighth month instalment they would already be into the ninth month of the contract. They will only receive a 3 month rebate.

Step 3

Multiply the total finance charges by the percentage from the rebate table to find the finance charge rebate amount.

eg, $202.30 x 11.54% = $23.35
Tony and Tina's rebate is $23.35.
This means that the amount Tony and Tina owe under their contract is reduced by $23.35.

Rebate Table

Insurance premium rebate

No complicated formula is required here. The customer should receive a refund of:

• all the premiums paid in advance for any full year, and
• whatever rebate the insurer provides for the current year.

eg, Rangi has paid $196 for consumer protection insurance to cover a 24 month hire purchase contract for a washing machine. He has decided to pay off his contract in the eighth month.

Rangi is entitled to receive a rebate of one full year of CPI premiums
= $98 ($196 ¸ 2).

He may also be entitled to four months rebate for this remaining year
= $32.67 ($98 ¸ 12 x 4 = $32.67).

Rangi should get a rebate of $130.67.

Repair or maintenance charges rebate

This rebate is calculated by multiplying the amount charged by the months left on the contract then dividing by the total period for the hire purchase.

eg, let's say Tony and Tina have paid $83 for maintenance on a 12 month contract. They have four months to go on the contract:

$83¸ 12 x 4 = $27.67

Tony and Tina should get a rebate of $27.67 for maintenance charges.