Credit contracts: Hire purchase, loans and other credit
Key terms and concepts
What is “credit”?
Credit Contracts and Consumer Finance Act 2003, ss 5, 6
A “credit” contract is an agreement you make to borrow money, or an agreement that gives you the right to put off (“defer”) payment of an existing debt or pay something off over time (for example, hire purchase).
The lender is called a “creditor” in the CCCF Act and sometimes a “credit provider” in other Acts. A lender is a person or institution that lends money to people under a consumer credit contract.
You the borrower are called the “debtor” in the CCCF Act.
What is a “consumer credit contract”?
Credit Contracts and Consumer Finance Act 2003, s 11; Credit Contracts and Consumer Finance Act 2003, ss 7, 11, 16, 16A; Fair Trading Act 1986, s 36B(4)
The protections in the CCCF Act apply only to what the Act calls “consumer credit contracts”. The Act’s protections don’t cover you when you get credit for your business or trade.
Your credit arrangements will be a “consumer credit contract” covered by the CCCF Act only if all the following conditions apply:
- you’re getting the credit as an individual and not as a company or organisation, and
- you’re getting the credit mainly for personal, domestic or household use, and
- you’re being charged interest or credit fees (such as an establishment fee or insurance fee), or you’ve put up some of your property as security for the loan, and
- the lender is someone who provides credit in the course of their business, or you and the lender were introduced by a paid adviser or broker.
A consumer credit contract can take the form of:
- a hire purchase, also known as a “credit sale” (see “What is hire purchase (‘credit sales’)?” below)
- a secured loan (see “What is a secured loan?” below)
- an unsecured loan (see “What is an unsecured loan?” below)
- a bank overdraft
- revolving credit – for example, a credit card
- a layby sale agreement, if you have to pay interest charges or credit fees under the agreement (for layby sales, see the chapter “Consumer protection”)
- mobile trader credit sales, for example a truck shop
- a lease of goods hiring or renting goods, such as a car. The CCCF Act treats a lease of goods as a hire purchase (and therefore a consumer credit contract) if the goods are mainly for your personal, domestic or household use, and either:
- the lease payments will be substantially the same as the cash price for the goods, or
- you have an option to buy the goods for no additional charge, or for a token amount, or for an additional amount that’s substantially less than what the goods will be worth at the end of the lease.
Buy now, pay later schemes
Buy now, pay later schemes like Afterpay are not consumer credit contracts. Buy now, pay later is a payment method that lets you buy an item and pay after receiving it, with no interest. Buy now, pay later sales are not currently covered by the CCCF Act. For buy now, pay later sales, see the chapter “Consumer protection”.
Credit Contracts and Consumer Finance Act 2003, ss 60–68
Since new laws have been introduced, truck shops and other mobile traders are now covered by the CCCF Act. That means that they must now follow responsible lending rules just as other lenders covered by the CCCF Act, see “Responsible lending requirements” in this section.
What is “interest”?
Credit Contracts and Consumer Finance Act 2003, s 16A
Interest is the cost of borrowing money, where the borrower pays a fee to the lender for the loan. For example, if you borrow $1,000 and the interest rate is 10% per year it will cost: $1,000 × 10% = $100 for 1 year. At the end of the contract period, you will pay back the lender the $1000 plus the $100 = $1100.
The interest rate is set by the lender and is usually shown in an annual basis, for example, ‘per annum’.
Note: The CCCF Act also provides separate, more limited protections for other types of leases of goods. It calls those other types of leases “consumer leases”.
What is hire purchase (“credit sales”)?
Credit Contracts and Consumer Finance Act 2003, s 5 (definitions of “credit sale” and “security interest”)
“Credit sale” is the name the CCCF Act uses for what’s often called “hire purchase”. This is when you buy goods or services but pay for them later, usually by instalments. Sometimes the seller will provide the credit, but usually the lender will be a finance company that’s separate from the seller. With hire purchase, unlike a layby sale, you get to take the goods home when you sign the contract.
However, until you pay off the goods the lender will usually have the right to repossess the goods if you miss your payments. Sometimes this means that the lender has formal legal ownership of the goods (legal “title”) until they’re fully paid off. But regardless of who has legal ownership of the goods while you’re still making your payments, you’ll be protected by the rules in the CCCF Act for consumer credit contracts, and the lender will have to follow the detailed processes in the Act if they want to repossess the goods (see “Repossession” in this chapter).
What is a secured loan?
Credit Contracts and Consumer Finance Act 2003, ss 9E-9I; Credit Contracts and Consumer Finance Act 2003, ss 83ZN, 83ZO; Personal Property Securities Act 1999, s 16(1)
A secured loan is where you borrow money and you (or a guarantor) provide property as security for the loan. The lender then has a “security interest” in that property. If you don’t meet your repayments on the loan, the property that was provided as security can be taken by the lender and sold – this is called “repossession” (see “Repossession” in this chapter). If the price the property sells for doesn’t cover the amount you borrowed plus the interest and other charges, you may still end up owing money to the lender.
Finance companies who offer secured loans often charge very high interest rates and sometimes ask you to provide some sort of security. The security will often be property that’s worth far more than the loan – for example, a car, or sometimes even your house. In these cases, you may be able to go through the disputes resolution process to change the terms of the agreement (see, “Dispute resolution schemes” below).
Lenders can’t take a security interest in some types of consumer goods, and any term in a credit contract that seems to do this will be legally invalid. This applies to beds and bedding, stoves and other cooking equipment, medical equipment, portable heaters, washing machines and fridges.
However, that restriction doesn’t apply when a bank or other lender loans you money specifically for the purpose of you buying an item in one of these categories. In such cases, the security over the item is called a “purchase money security interest”.
Lenders can’t take a security interest in passports and other travel documents, ID cards and documents, and bank cards.
What is an unsecured loan?
An unsecured loan is where you borrow money without providing any security. You can still be charged interest or credit fees. You can generally expect the interest rate for an unsecured loan to be higher than that for a secured loan.