Most people use credit at various times in their lives, whether it’s through personal loans, mortgages, hire-purchase agreements (now called credit contracts), credit cards or overdrafts. In this report, we outline your rights as a borrower.
Regardless of the reason or the method, when borrowing money it’s 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.
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.
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 pay a fee if you make early payments
- a statement of your rights to cancel the contract.
You have a "cooling-off" period of 5 working days after you have received the written disclosure statement. During this time you can cancel the contract.
But if it is a credit contract (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 credit contract and take it and the documentation home. The next day you want to cancel the deal because you believe the cost of the credit is too high.
You can cancel the credit contract agreement, but you must still buy the car. You will have to organise finance from elsewhere.
However, if a product isn’t of acceptable quality and you reject it under the Consumer Guarantees Act the supplier can be held liable for the loan. You can apply for an order from the Disputes Tribunal formally transferring your obligations to the supplier if:
- you bought goods or services from the company under a credit agreement
- the company is party to the contract, and
- you reject the goods or cancel the services under the Consumer Guarantees Act.
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 your contract is 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.
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 cannot be “unreasonable”.
There is no limit on the rate of interest that can be charged, but the Act specifies how lenders must calculate interest.
If you fall into "unforeseen hardship" while 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 let you postpone repayments for a time without changing the annual interest rate.
Hardship applications can be made up to 2 months after default.
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 Act.
See our legal rights guide to repossession.
If you’re buying on hire purchase, the seller may insist the goods be insured. You pay for this. However, the lender must be satisfied the insurance is suitable and you can meet repayments without suffering substantial hardship.
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 depends on how much longer the contract had to run.
Usually a seller will be 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 often require 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 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
Due to the complexity of credit law, we 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.
If you believe your lender has breached the Act, talk to them. If you remain dissatisfied, you can make a complaint to a financial dispute resolution scheme. Lenders must belong to one of the following four schemes.
- Banking Ombudsman
- Insurance and Savings Ombudsman
- Financial Dispute Resolution
- Financial Services Complaints
Your lender must tell you which scheme they have joined. You can also check details on the Financial Service Providers Register on the Companies Office website.
You can also make a complaint to the Commerce Commission which enforces the Credit Contracts and Consumer Finance Act. It can prosecute lenders for breaches of the Act and the Court can ban a person who is found guilty from being a director or employee of a money lending business.