Borrowers' rights

Most people use credit at various times in their lives, whether it is through personal loans, mortgages, hire-purchase agreements, credit cards or overdrafts.

Regardless of the reason or the method, when borrowing money it is important to know your rights and obligations.

The main law to protect consumers in credit contracts is the Credit Contracts and Consumer Finance Act 2003. It covers all loan deals that are primarily for personal, domestic or household purposes.

In this report, we outline your rights under the Act.

Information disclosure

When you borrow money or sign up to a hire purchase or any other credit deal, the lender must provide you with accurate information in writing about what the loan will cost you. This is known as the disclosure statement. They must give you this before the contract is made or within five working days.

In the disclosure statement you must be told:

• exactly how much your repayments will be;
• how much interest you'll be charged, and how the interest is calculated;
• any other fees (such as loan establishment fees, insurance charges, the cost of credit checks carried out by the lender) you are charged;
• what will happen if you can't make your payments;
• whether you'll have to pay a fee if you make early payments;
• a statement of your rights to cancel the contract.

Cancelling a credit contract

You have a "cooling off" period of three working days after you have received the written disclosure statement. During this time you can cancel the contract.

But if the contract is a hire purchase deal and you have already taken possession of any goods bought using the credit, you must still buy the goods even if you cancel the credit.

For example, assume you buy a car on hire purchase and take it and the documentation home. The next day you want to cancel the deal because you believe the cost of the hire purchase is too high.

You can cancel the hire-purchase agreement, but you must still buy the car. You will have to organise finance from elsewhere.

Fees

Establishment fees (for setting up the loan) must be linked directly to the costs involved. Third party fees (say, if the lender arranges for a valuation or a credit check) must be passed on directly.

If you choose to repay your loan early, you can only be charged a fee that reflects the lender's loss (from unearned interest and other charges). As the lender can lend the money out again, any loss should be minimal.

Other fees must be related to the actual cost to the borrower and to "reasonable standards of commercial practice".

There is no limit on the rate of interest which can be charged, but the Act specifies how lenders must calculate interest.

Early repayment

You can pay a credit deal ahead of time. This can be in full or, some contracts will give you the opportunity to make a part payment. Lenders may charge a fee for early payment but if you ask they have to give you details of what this will be and any fee must be reasonable.

Oppressive contracts

If you have signed an oppressive contract - which means it has harsh or unreasonable terms - you can take your case to the Disputes Tribunal or the District Court. If it rules that your contract is indeed oppressive, it has the power to order a change to the terms. Before taking such action, see if you can negotiate a change in the terms with the lender.

Hardship

If you fall into "unforeseen hardship" while you're locked into a loan or hire purchase agreement, you can ask the lender to change the contract so you can still pay off your debt.

The hardship must be caused by an unexpected event such as illness, injury or redundancy.

You can ask the lender to extend the time you have to pay off the loan, and/or to let you postpone repayments for a time without changing the annual interest rate.

If the lender doesn't agree to a reasonable request, you may apply for an order from a Court (or the Disputes Tribunal, if the outstanding balance is $15,000 or less) which may require the lender to make the changes.

Unfortunately, you can't apply for a change if you are in arrears.

Repossession

If you slip behind with your payments or break other terms in a contract, then the lender can repossess the goods you have bought on hire purchase or offered as security for a loan. The right to repossess must be explained in the contract and the lender has to follow the steps set out in the Credit (Repossession) Act 1997.

See our full legal rights guide to repossession.

Insurance

If you're buying on hire purchase, the seller may insist that the goods be insured. You pay for this. Such insurance is good protection for you. If the goods are stolen, you will still have to pay off what you owe on the hire-purchase agreement. If the goods were uninsured this will leave you with nothing to show for it all.

If you repay the loan early, you may be entitled to a partial refund of any insurance premiums you paid. The amount you get back will depend on how much longer the contract had to run.

Usually a seller will be quite happy to have the goods covered by any existing contents policy. If you have contents insurance, take along proof of this when you go shopping for hire purchase. Make sure your policy covers goods on hire purchase.

Sellers also often require that you have repayment insurance and that you pay for it. This insurance gives limited cover if you lose your source of income because of illness, accident or redundancy. Some policies will also pay out if you die.

Repayment insurance should only be considered to cover illness and redundancy. If you have life insurance, you won't need repayment insurance to cover the chance of your dying. Also, ACC means you shouldn't need it to cover accidents.

Consumer protection laws

Remember, as with other purchases, goods sold on hire purchase must comply with the Consumer Guarantees Act and the Fair Trading Act.

In trouble?

Due to the complexity of credit law, we strongly advise anyone who believes they have been treated unfairly by a lender to seek advice from a lawyer, their local Community Law Centre or Citizens Advice Bureau. If you are one of our members, you can contact our advice service for assistance.

The Commerce Commission enforces the Act. It wants to hear about breaches to the Credit Contracts and Consumer Finance Act. The Commission won't take up individual cases - you do that through the Disputes Tribunal or the District Court. However, it can prosecute lenders for breaches of the Act and the Court can ban a person who is found guilty of breaching the Act from being a director or employee of a money lending business.

More help

• Access the full text of the Credit Contracts and Consumer Finance Act 2003 at www.legislation.govt.nz