Credit contracts: Hire purchase, loans and other credit

Interest and fees

What interest can I be charged under a consumer credit contract?

Credit Contracts and Consumer Finance Act 2003, ss 36-40

The interest rate and the method for calculating interest must be fully and clearly disclosed at the beginning of the contract (see “Information you must be given” in this section). In particular, the contract must state the annual interest rate.

The law doesn’t set a limit on the interest rates, except that the rates must not be “oppressive” (see “Challenging an unfair credit contract” in this section). But the law does limit how interest can be charged. Usually, interest must not be charged in advance – that means you can only be asked to pay it after it has built up.

The lender can charge a higher interest rate (a “penalty rate” or “default rate”) on the amount of a payment you’ve missed until you get your payments up to date. They can’t raise the interest rate for the whole unpaid balance just because you’ve missed a payment or done something else in breach of the contract. However, if you go over your credit limit you can be charged a higher rate on your total debt until you bring it back under the credit limit.

If the lender is going to charge a penalty interest rate, this must be set out in the contract and the penalty rate must be fair (see “Challenging an unfair credit contract” in this section).

What fees can I be charged under a consumer credit contract?

Credit Contracts and Consumer Finance Act 2003, ss 41-45, 94(1)(ca)

Lenders can charge you various credit and default fees, but these must be reasonable, and the lender must have told you about all these fees at the outset of the contract (see “Information you must be given” in this section). If a fee is unreasonable, you can apply to the District Court to have it reduced or cancelled.

When the courts are deciding whether a credit fee or default fee is reasonable, the following specific rules apply:

  • Establishment fees – These fees (sometimes called “application fees” or “booking fees”) should generally be no more than the lender’s reasonable costs in setting up the credit contract, including the costs of processing your application, documenting the contract and advancing the credit.
  • Break fees – These are fees you’re charged if you repay the debt, or some of it, early. (They’re called “prepayment fees” in the CCCF Act.) They can’t be more than a reasonable estimate of the lender’s loss resulting from the early payment.
  • Other credit fees – For other types of credit fees charged by lenders (for example, for the administrative costs involved with early payment, or “prepayment”), the fee should generally be no more than is needed to reasonably compensate the lender for any costs they incurred. The judge will take into account reasonable standards of commercial practice.
  • Default fees – These are fees you’re charged for missing payments or breaching the contract in some other way, for example, a repossession fee. Default fees should generally be no more than is needed to reasonably compensate the lender for any costs or losses they were caused by your default. The judge will take into account reasonable standards of commercial practice.
  • Third-party fees – Lenders can also pass on to you any fees they’ve been charged by others in relation to your credit contract – for example, the fee for a credit check, or a broker’s fee. The lender can’t mark up these fees: you can only be charged what the lender was charged.

Note: If the lender complied with the Responsible Lending Code when they charged a fee, this will be evidence that the fee is reasonable.

Unregistered lenders can’t charge interest or fees

Financial Service Providers (Registration and Dispute Resolution) Act 2008, s 11; Credit Contracts and Consumer Finance Act 2003, s 99B

Lenders must be registered as financial service providers. If they aren’t registered, they can’t charge you any interest or fees under a credit contract.

If a lender registers after you’ve entered into a credit contract with them, they must give you written notice of this, and they can’t charge you interest or fees for the period before you were given the notice.

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