Credit contracts - loans and credit sales

What is credit?

Credit is when you borrow an amount of money and don’t have to pay it back straight away. Usually you pay the amount back in regular instalments (payments). The total you repay will cost more than the amount you borrowed because you may also have to pay:

• extra costs in arranging the credit, such as documentation fees, administration costs or booking fees
• interest on the money you borrowed.

People borrow money for all sorts of reasons, including to buy services and goods such as cars, household appliances, furniture and stereos.

Is there a limit on the interest rate?

The law doesn’t limit the rate of interest lenders can charge you. However, it does set out how lenders must calculate interest, and this must be explained in your contract. It pays to check the rates of a number of lenders before signing a contract.

Credit sales

A credit sale is where you buy goods on credit. You’re allowed to take the goods and use them while paying the money back (this type of credit used to be called hire purchase). You don’t own the goods until you have paid the credit off in full.

A credit sale is different from a lay-by sale. With lay-by the goods stay with the seller until you’ve made the final payment.

Credit sale contracts

Usually you will enter a credit sale contract with a seller, but the seller is likely to have an arrangement with a lender (finance company) for the credit. The seller will either be acting as an agent for the lender or transfer your contract to the lender. See What’s in a contract for more detail on what this contract must include.

Loans

When you borrow money as a loan, you and the lender enter a credit contract. The loan will be one of two types:

• A secured loan, where the lender asks you to list goods you own (such as a car) as ‘security’ for the loan. This means the lender can seize and sell the goods if you don’t repay the money.

Or

• An unsecured loan, where you don’t have to provide the lender with a list of your goods for security.

Providing security for loans

If you’re asked to provide security, don’t list goods that are worth more than the loan, as the lender can seize your security if you don’t keep up your payments.

For example, if you list your house as security when buying a car and then fail to make payments, you could end up losing the house to pay off the car.

You can’t list goods that:

• don’t belong to you
• you’re still paying off under a credit sale agreement
• you’re already using as security for other loans.

Check out deals with other sellers and lenders

For goods…

It pays to check out the cost of credit deals in several stores before making your purchase – it may be cheaper to take out a bank loan. If you don’t need the goods right away, ask the seller if lay-by is available. This may be a cheaper option as it won’t include credit costs such as interest charges.

For loans…

Check with several banks or lenders before taking out your loan. Loans from smaller finance companies often cost more than loans from banks because of higher interest rates.

Who can get credit?

If you’re over 16 years old you can apply to borrow money or buy goods on credit as long as you meet the lender’s credit conditions. These are usually based on your ability to make the payments. Lenders may check your credit background to make sure you haven’t failed to meet credit payments in the past.

The lender may ask you to provide a co-borrower or guarantor if, for example, you’re under 18 years old or have a poor credit history.

What is a guarantor?

A guarantor is someone – often a friend or family member – who takes responsibility for your debt if you don’t keep up the payments.

Guarantor rights

The guarantor has to enter a contract with the lender promising to take on this responsibility. The contract will state:

• the amount the guarantor is guaranteeing
• the circumstances where they will have to pay
• how long they’re responsible for guaranteeing the loan or credit sale.

The lender must keep the guarantor informed, in writing, of the conditions of the contract between the lender and the borrower. This includes:

• the original information about the contract including a ‘disclosure statement’ and terms and conditions
• any changes made to the contract while the goods or the loan are being paid off
  any action taken to repossess the goods.

What’s in a contract?

You enter into a credit contract when you:

• borrow money
• buy goods on credit (credit sales)
• get a bank overdraft
• use revolving credit – eg, a credit card.

The credit contract sets out in writing your rights and what the lender expects you to do. It tells you:

• what you’re buying, or the amount you’re borrowing
• how much it will cost to borrow, including fees, charges and interest
• how much and how many payments you have to make
• when and how you have to make these payments.

Why do I need to read my contract?

It’s very important that you read the contract before you sign it. Why? So that you know about your obligations and your rights. If you can’t understand it, show the contract to someone who can – a friend or a family member – or seek help from your local Citizens Advice Bureau [external website] or Budgeting Advisory Service [external website] see Getting outside help.

Who is the contract with?

With a loan, your contract is with the lender. When you buy goods on a credit sale, you’ll first deal with a seller. This is because most sellers have agreements with lenders (finance companies) who provide the credit. So, while you buy the goods from the seller, you make your credit sale contract payments directly to the lender. Your contract should tell you who the lender is.

Sometimes the seller may be required to seek credit approval from the lender before finalising your credit contract. In a credit sale, don’t take the goods home until approval has been given and you’ve signed the contract.

Making wise choices

Before you enter a credit contract, ask yourself:

• can I afford the payments?
• what are the extra charges I have to pay, and am I prepared to pay them?
• will I be able to keep paying the instalments for the length of the contract?

A closer look at contracts

The information provided to you under your credit contract must be in writing. It will be in the form of a ‘disclosure statement’ and other terms and conditions.

The lender must include information that is necessary for you to understand your rights and obligations. If any of the information listed below is missing from your disclosure statement, you may not have to pay all the costs of credit, such as fees and charges set out in your contract.

The contract must include information:

About the lender

• their name and payment address details.

About how much you are borrowing

• the amount borrowed or the price of the goods (for credit sales)
• the total amount owed
• the number of payments
• the amount of each payment
• when each payment has to be paid.

About how much the credit is costing you

• the total amount of interest to be paid
• the interest rate and how it’s charged
• the length of the interest-free term, if any
• booking or establishment fees
• insurance fees – this could be to cover the goods in case of damage or to cover your ability to keep making payments
• all other fees, such as a credit check or security valuation fee.

All credit contract fees have to be reasonable and must be based on the lender’s costs of providing the contract.

About other conditions

• information about the goods you have listed as security for the loan (for credit sales the security is over the goods you’re buying)
• fees the lender may charge if you don’t keep up payments (these are called default fees)
• charges you may have to pay if you pay the goods or loan off early
• how often the lender will send you statements.

About your rights

• when and how you can cancel the contract
• any refund for paying the goods or loan off early.

How will I receive the disclosure statement?

The lender must give or send you this information in written form. The statement can follow a format set out in the Credit Contracts and Consumer Finance Regulations. The statement is part of your contract.

When should I receive my disclosure statement?

The lender should give or send you a copy of the disclosure statement and any other terms and conditions either before the contract is made or within five working days afterwards. See Problems with credit for information on what you can do if you don’t receive the disclosure statement and other documents.

Your checklist

Use these questions as a checklist before you sign a credit contract…

Do I know…

• what I will pay in total for this credit?
• who I have to pay and when I have to pay them?
• how many payments I will have to make?
• how much each payment will be?
• if I have to pay any other fees?
• what my rights are to cancel the contract or to repay early?
• whether the lender has security over the goods (for credit sales)?

Other things you might want to check:

• do the figures add up?
• do I need insurance for the goods or to cover my payments?
• are the goods correctly described (for credit sales)?
• is the lender’s request for security reasonable?
• do I need advice from a budget advisor or legal expert (see Getting outside help )

Think twice before you sign

Don’t sign a credit contract if you’re not sure. Ask for a copy, take it home to read, get advice and compare the costs with those of other sellers or lenders.

What you have to do

Carefully check the terms set out in your contract (the ‘fine print’), as these tell you what you’re required to do. Once you sign a contract, in law, you’ve agreed to it even if you haven’t read it.

The types of obligations the lender might require of you are:

About you

• you have to tell the lender, in writing, if you change address.

About payments

• you must keep up the payments. If you fall behind you may have to pay:
  • default interest (usually higher than the contract rate)
  • costs for sending out reminder notices (some companies charge $15 per notice)
  • charges for having goods returned to you if they are repossessed.

About the goods – for credit sales contracts

• you must keep the goods insured
• you must keep them in good working order
• you must keep the goods in your control – eg, you can’t lend a stereo you’ve bought on credit to someone else to keep in their home
• if you’re buying a car, make sure an unlicensed driver doesn’t drive it.