Partner at Cavell Leitch Law
Partner at Clark Boyce Lawyers
How to get out of a loan contract, credit sale (hire purchase agreement) or other consumer credit contract
If you change your mind about a consumer credit contract (such as a loan contract or a hire-purchase agreement), or later discover that you will not be able to afford the payments, you may be able to modify or get out of the contract, in one of the following ways:
- The law allows you a three-day "cooling off" period after you sign the contract to change your mind and cancel the contract.
- You may be able to get out of the contract if the lender hasn't provided you with all the information that the law requires.
- You may be able to get out of the contract if the contract or the lender's conduct is oppressive.
- You may be entitled to have the contract amended if something unforeseen has caused you hardship.
The laws that protect people who enter into consumer credit contracts are contained in the Credit Contracts and Consumer Finance Act 2003, which came into force on 1 April 2005. This Act simplifies the law by replacing both the Credit Contracts Act 1981 and the Hire Purchase Act 1971, and strengthens some of the protections for consumers. (Hire-purchase is now called a "credit sale" under the Act.)
That Act also contains special protections for consumers to do with home "buy back" schemes; these protections came into force in October 2003. See How to be protected against home "buy back" schemes.
What is a "consumer credit contract"?
In general, the protections in the Credit Contracts and Consumer Finance Act 2003 apply to consumer loans, hire-purchase agreements (credit sales) and other consumer credit contracts.
A "consumer credit contract" is defined as a contract where all of the following conditions exist:
- you, the borrower, are an individual (as opposed to a company or other body), and
- you've entered into the contract mainly for personal, domestic or household purposes (as opposed to business purposes), and
- interest charges or credit fees are, or may be, payable under the contract, or a security interest (for example, over your car) is, or may be, taken under the contract, and
- giving credit is part of the lender's business, or the lender makes a practice of giving credit on behalf of someone else, or the contract came about because a paid adviser or broker introduced you to the lender
These rules mean that a lender doesn't have to comply with the 2003 Act if, for example, the borrower is a small company, or the money is borrowed for business purposes. In cases where it's unclear to the lender whether the loan is for business purposes, the lender can ask the borrower to sign a declaration that it is for business purposes; if the borrower does so, the contract isn't covered by the Act and the lender doesn't have to comply with it.
These rules also mean that interest-free contracts can sometimes be covered by the Act. For example, a secured loan can be covered by the Act even if no interest is payable.
There is no maximum amount for a consumer credit contract. A contract will be covered by the 2003 Act if it satisfies the four conditions above, regardless of how much money is involved.
The "cooling off" period: The right to cancel the contract
The Credit Contracts and Consumer Finance Act 2003 provides consumers with a period in which they can change their minds and cancel a consumer credit contract, as follows:
- In the case of a loan, you have three working days after the initial signing of the contract to cancel it. You must do this in writing, and you must return all the money borrowed to the lender.
- In the case of a credit sale (hire-purchase) where you haven't yet taken the goods home, you have three working days after the initial signing of the contract to cancel it, by notice in writing.
- In the case of a credit sale (hire-purchase) where you have taken the goods home, you must give a written cancellation notice within three working days after the initial signing of the contract and pay the cash price of the goods within 15 working days of the initial signing. In other words, you can cancel the credit part of the arrangement, but not the agreement to buy the goods. You cannot simply take the goods back.
You must, however, pay interest for the period for which the credit was provided and the lender's reasonable costs of the cancellation.
No right to cancel in certain cases
You don't have the right to cancel if the credit is provided for less than two months and you haven't used any of the credit to pay the lender for money owed under a different credit contract.
The cancellation notice
The cancellation notice does not have to use any particular words. It can be expressed in any way that shows you intend to cancel or withdraw from the contract.
You can give the cancellation notice (and return the goods or money, or pay the cash price) to a lender by giving it to them or their agent or employee, or by posting it to the lender's last known home or business address.
(The cancellation notice can also be given by email or some other form of electronic communication if the lender has agreed to this being done.)
Creditor's failure to "disclose" makes the contract unenforceable
The law requires lenders to give certain information to borrowers (this is called "disclosure"). If you were not given this information within the time limits that the law specifies, the lender cannot enforce the contract against you. This means that they are not able to:
- enforce the requirement that you pay interest, or
- in the case of a credit sale (hire-purchase agreement), repossess the goods, or
- in the case of a secured loan, take possession of the property you listed as security for the loan
What information does the creditor have to give me?
A consumer credit contract must be in writing and must be signed by both the borrower and the lender.
It must include the following information, which is called "initial disclosure":
- Information about the lender
- the lender's name and address
- the amount you're borrowing (in the case of a loan) or the price of the goods (in the case of credit sales/hire-purchase)
- Information about the interest payable
- the annual interest rate and the method of charging it
- the total interest to be paid
- the length of any interest-free term
- The payments
- the amount of each payment
- the number of payments
- the total amount you will pay
- when the first payment is due and how often the payments will be made after that
- Security interests
- if it is a secured loan, details of the goods listed as security
- Other fees and charges
- all fees and charges other than interest, such as booking or establishment fees, insurance fees, credit check fees, and security valuation fees
- default fees (that is, fees you will have to pay if you don't keep up your payments)
- fees you may be charged if you pay off the goods or loan early
- Information about your rights
- a statement of your right to cancel the contract (see above, "The â€˜cooling off' period: The right to cancel the contract")
- how often "continuing disclosure" statements will be sent to you (if they're legally required in the particular case)
The format for initial disclosure
The information must be written clearly, concisely and in a way likely to bring it to the attention of a reasonable person. (Some model disclosure forms are included in the Credit Contracts and Consumer Finance Regulations 2004 (SR 2004/240).)
It can be made in the form of an email or other electronic communication if:
- you've consented to it being given to you in this way, and
- the information is readily accessible so that you can refer to it again if you wish
When does initial disclosure have to be made by?
You must be given a copy of this information not later than five days after signing the contract.
No unreasonable fees
Lenders cannot charge unreasonable credit fees or default fees.
Re-opening consumer credit contracts that are oppressive
The Courts or the Disputes Tribunal can re-open a loan contract, credit sale (hire-purchase agreement) or other consumer credit contract if:
- the contract is oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice, or
- the lender has exercised, or intends to exercise, a power under the contract in a manner that is oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice, or
- you were induced to enter into the contract by means that were oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice
In these cases, the Court or the Tribunal has the power to set aside the contract or vary its terms.
In general the Courts will not reopen credit contracts merely because, for example, a penalty interest rate is high, and will tend not to intervene if the borrower is experienced and clearly understood the contract. The Courts are more likely to intervene if the borrower's understanding was limited in some way â€“ for example, by not being able to speak or read English or by some disability.
Modifying the contract in cases of "hardship"
You can ask the lender to change the terms of the contract if you believe you are unable to keep up with the payments under the contract because of some unforeseen hardship - such as being ill or injured, or losing your job, or your relationship breaking up, or the death of your spouse or partner, or some other reasonable cause. However, you can't do this if you've already missed a payment or exceeded a credit limit.
If the lender doesn't agree to amend the contract, you can apply to the Courts or a Disputes Tribunal for it to amend the contract. The Court or Tribunal will give both you and the lender a reasonable chance to be heard.
What if I want to pay out the contract early?
You have the right to pay out the full amount at any time, but the lender has the right to charge you, in addition, their administrative costs for the repayment and a reasonable estimate of the loss the repayment has caused them.
Creditors can't "contract out" of the legal requirements
The protection given borrowers by the Credit Contracts and Consumer Finance Act 2003 applies even if the particular contract says it doesn't apply. In other words, lenders can't contract out of the rights given to borrowers.
Lenders can bring existing contracts under the 2003 Act
Consumer credit contracts made before 1 April 2005 are ordinarily not covered by the Credit Contracts and Consumer Finance Act 2003.
However, a lender can choose to bring those existing contracts under the new Act, provided this does not increase any of the borrower's obligations. This allows a lender to operate a single system rather having to run two different systems, with one set of contracts covered by the old laws and another set covered by the 2003 Act.
Special rules for "buy back" schemes
Special protection for consumers were introduced on 14 October 2003 to cover home "buy back" schemes. These schemes, apparently common in South Auckland, have resulted in many homeowners losing their homes. For more information, see How to be protected against home "buy back" schemes.
- If you are considering borrowing a large amount of money under a credit contract, it would be wise to see a lawyer before doing so in order to fully understand the effects of the agreement.
- Guarantors should be aware that they generally do not have a legal right to get out of a credit contract.