There is a wealth of ways in which retailers make high priced items affordable – you can choose to ‘buy now pay later’, or spread the cost in monthly instalments, or both. You may choose to get an independent loan or finance it through a new credit card. Whatever method you choose, you will be party to a consumer credit agreement, which may involve third party finance. The vast majority of credit agreements are regulated by the Consumer Credit Act, which has important implications for in terms of how financial information is presented, your rights under the Act and whether you are able to cancel the agreement.
In addition to credit and store cards, personal loans and overdrafts, a credit agreement will govern the following types of contracts:
- Finance options for the purchase of goods and services (credit sale agreements)
- Hire purchase agreements
- Hire agreements
- Conditional sale agreements
Credit sale agreements
This is the most common type of financing option when purchasing high-priced goods and services such as cars, electronic goods, or home improvements. It is basically a loan to over the purchase price of the item, with the loan paid back the loan in equal monthly instalments over several months or even years. The consumer (the ‘debtor’) may pay a large initial deposit (such as with the purchase of a car), or not pay anything at all for the first year or two. Either way, you will legally own the goods as soon as the credit sale agreement is made, even if you have paid nothing at all. Where ‘interest-free credit’ is advertised, you will have a specified time to pay back the outstanding balance, otherwise the due balance will automatically roll into a longer term credit agreement where interest will be payable.
Hire purchase (HP) agreements
Under this arrangement, you will pay monthly instalments to hire the item, but will not legally own it until the final instalment has been paid. This type of agreement may also give you the option to buy with a lump sum at the end of the period, such as with ‘balloon payments’ on car finance.
This is simply the hire of goods at a (usually low) monthly fee. You will never own the item, but must keep up the payments for the term of the contract to avoid having the goods repossessed and being sued for the outstanding debt.
Conditional sale agreements
This is very similar to the HP agreement described above. Even though you will be in possession of the goods in question, you will only own them on the condition that you have paid all the instalments. However, the agreement may also specify other conditions to be met before ownership can take place.
Look at the figures
In order to see exactly what you will end up paying and so that you can compare the cost of different agreements over different timeframes, the Consumer Credit Act requires companies to clearly present key financial information, including:
- The loan amount
- The charge for credit
- The total amount payable
- The monthly instalments
- The Annual Percentage Rate (APR)
As this example shows us, by opting to buy now pay in 12 months in 36 monthly instalments you could be paying a good 80% more (£540 extra) on the original price. The APR must also be shown to illustrate how ‘expensive’ the credit is. It also enables you to shop around for the best deal.
|Total Charge for Credit||£544.76|
|Total Amount Payable||£1294.76|
For more detailed information on exactly what information must be presented, how it should be presented, and when, go to our section on the Consumer Credit Act
Can I get out of the agreement?
Whether or not you have a cooling off period depends how the contract was made. Where you have been presented with the paperwork to sign on trade premises, it is legally binding from the moment they are it is signed. If you entered into the contract at a distance – over the phone, via the internet, by post, or if you dealt with a broker, then you will have a cooling off period of 14 days (30 days for some products). See our section on Consumer Rights for more on this.
Terminating and early repayment
You can terminate an HP or conditional sale agreement at any time before payment of the last instalment, provided you have paid at least one half of the total price and you have taken reasonable care of the goods to be returned. For hire agreements you can only terminate the agreement after 18 months (unless an earlier date is mentioned on the contract).
The Consumer Credit Act gives you the right to repay the debt early and complete the payments ahead of time, as long as you provide written notice to the lender of your intention to do so. You will also be able to get a statutory rebate for the charge for credit. The rebate must also be calculated according to regulations set out in the Act – not of the lender’s choosing!
If you default on payments
If you have missed (defaulted on) at least two or more payments (i.e. you are in arrears), the lender will, within 14 days, send you a notice of default which will explain fully your obligations and risks. It will tell you how behind you are in your payments, what action you must take and when, and whether any additional sums of money (default sums) have been incurred as a result. It also informs you of the consequences of ignoring the notice and what the lender is entitled to do, which may involve any or several of the following:
- To terminate the agreement
- To demand early repayment of any sum
- To repossess the goods
- Enforcement of security in lieu of what you owe (possible involvement of bailiffs)
The supplier cannot repossess goods without serving you with this notice and waiting for the required time to enable you to respond (14 days).
If you cannot afford the repayments
If you are already in default and you have received a notice to this effect, or the company has started proceedings against you, you can apply for a ‘time order’ from the courts. If successful, this will give you a longer amount of time to pay, in the context of your personal situation. To avoid further action from the lender in the meantime, you must write to them advising them of your intentions.
If you are not yet in default but feel that you will have difficulty meeting the monthly instalments, you are advised to contact the lender (the supplier or the finance company) without delay informing them of the situation. Also seek help from one of the numerous debt advice agencies such as National Debtline who will be able to set up a Debt Management Plan (DMP), negotiate with creditors on your behalf to help you get back on track with your repayments and avoid potential legal proceedings.
For more on this, see:
- Consumer Credit Act
- Consumer Credit Act: Required Information
- Consumer Credit Act: Consumer Rights
- Ending a Credit Agreement
- Defaults, Arrears and Debt Collection Agencies
- Debt Management Companies