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When looking at the main types of
credit agreement and the way they work, we've so far avoided
any specific mention of the law. There are, in fact, very
strict rules about lending and borrowing and most of them
are laid down in the Consumer Credit Act. They're there
to protect you!
Most of the rules in the Act apply to
credit agreements, whatever the type of credit, where the
amount you borrow (the amount of credit) is £25,000
or less. So most credit deals you're likely to take on in
the future will be covered.
Before you get as far as taking out a credit agreement,
the Consumer Credit Act protects you by having rules about:-
Licensing
The Act says that nearly everyone in the business of lending
money, introducing their customers to credit deals or even
hiring their goods out for long periods, must have a special
licence. These licences can only be granted by the Office
of Fair Trading in London and then only if the Director
General of Fair Trading is satisfied that the person or
firm applying for one deserves it.
Advertising
Advertising can be very persuasive. Phrases like.- 'No Deposit'
and "This could be yours for only £5 per week"
can be very tempting, So it's a rule that anyone advertising
credit must tell you the truth about the deal they're offering
you.
These are the things to look for
and ask about and compare.
- The APR - short for 'Annual Percentage Rate of charge
for Credit'. It's easier just to remember APR. It's worked
out in a way set down by law. It takes account of everything
you have to pay to get the credit - interest and any other
charges.
- The cash price of the goods or services. It's very
important to look at this, particularly when you see 'interest-free
credit' advertised. With interest free credit, the total
amount you pay back must not be more than the cash price.
But check how the cash price compares to other shops.
If it's very high, the 'interest-free credit' may not
be such a good bargain.
- The amount of deposit. Remember that the less you pay
by way of deposit, the more of the cash price you will
borrow, and pay charges on, increasing the total amount
you will pay in the end.
- The length of time the loan is to run. Could you still
afford it if you had to cope with a drop in income before
you'd made all the repayments?
- The amount and frequency of repayments and what the
whole credit deal will cost. If the APR is relatively
low but the cash price is very high, it's important to
look at what the whole deal adds up to. Remember that
the APR represents only the cost of credit; it doesn't
tell you whether the price itself of the goods is reasonable.
- Whether you have to offer any security for the credit.
If you're under 18, you'll probably need your parents
or another adult to stand as guarantor. It means they
promise to pay your debts if you can't. It's a legally
binding promise and it means they can be taken to court
if they don't keep it.
It's illegal for traders to send
anything through the post to people under 18 inviting them
to borrow money or obtain other credit facilities. You may
also find that if you approach shops about buying on credit
when you're under 18, they will often be unwilling to consider
doing business with you.
There is a good reason for this! If you
don't keep up your repayments and you're under 18 (what
the law calls a minor), the shop or lender may not be able
to sue you successfully to recover their money. This is
because the law says that if a minor fails to pay his debts,
the person to whom he owes money will only succeed in suing
if the goods bought with the money lent were real "necessaries"
- i.e. things the minor really needs rather than just things
he or she wants.
Because of this, many traders prefer
to deal with the over 18s where expensive items are concerned
or ask someone to stand as guarantor. That way, they make
sure they get paid one way or another.
When you apply for credit, the lender
will usually want to make sure that you are 'credit worthy'.
In other words, that lending money to you is a safe bet.
In order to check your creditworthiness the lender will
often consult a Credit Reference Agency, which may
have some information about you. Credit Reference Agencies
collect and store information about people's financial standing
that they pass on request to their clients - the people
from whom you have asked for credit. The agencies must have
a license under the Consumer Credit Act. They do not advise
the lender on whether you may be a good risk or not, or
comment in any way on the information which they provide.
This information may help the lender
in deciding to give you credit. It may however, also make
him think again.
If this happens, you can't insist on
being given a loan, nor does a dealer or lender have to
tell you why you've been turned down. But they must,
if you ask in writing, tell you the name and address of
any Credit Reference Agency which they consulted about you.
The law says that you can find
out exactly what a Credit Reference Agency has on file about
you by writing to the Agency. If there's something on your
file which is incorrect you can have it put right. But do
remember that the lender may have turned you down for some
reason having nothing to do with what is on your Credit
Reference Agency file.
Comparing what's on offer, applying
for credit and perhaps having your creditworthiness checked
by the lender are only the beginnings of a credit deal.
Before you're actually given credit, you'll be asked to
sign a credit agreement. Again, there are rules set down
in the Consumer Credit Act which aim to protect you. These
include rules about:-
A credit agreement must set out
the terms of the deal you're taking on in detail and explain
your rights under the agreement. For instance, if you're
taking out hire purchase to buy a TV, the agreement must
show:-
- The cash price
- The deposit
- The balance to be financed
- The amount and date of each repayment
- The charge for credit
- The total credit price
- The APR
If you're taking out a credit card agreement,
it must show your credit limit or tell you how it will be
worked out, give you details of how your monthly payment
will be calculated and tell you the APR.
NEVER SIGN A BLANK FORM. Make sure all
the financial details have been filled in first. Read it
carefully and make sure you understand it. If you don't,
seek advice before you sign it.
This briefly explains your rights under
the Consumer Credit Act and tells you where to go for advice
if you want to know more about them. DON'T SIGN A CREDIT
AGREEMENT IF YOU HAVE ANY DOUBTS.
You should be given a copy of your
agreement as soon as you sign it and usually you'll receive
a second copy through the post within about a week. Keep
these copies somewhere safe - you may need to refer to them
one day.
If you sign a credit
agreement at home, you may have a few days in which to cancel.
This short 'cooling-off period' only applies where the trader
has discussed the deal with you in person (not on the telephone)
and you then sign the agreement at home or anywhere other
than at the trader's premises.
The cooling-off period, at the moment
five days, starts from the day that you get your second
copy through the post.
Your agreement should give you clear
details of your cancellation rights - read them carefully.
When you sign a credit agreement in a shop, you don't have
any 'cooling-off period'.
Once you've
taken out a credit agreement, there are still problems you
may come up against and it's as well to think about them
before you have to deal with them. For instance:-
What if something you've bought on credit
turns out to be faulty? If this happens to you, don't
stop making payments. Even though you may have a valid complaint,
you'll be putting yourself in the wrong if you break your
side of the deal.
When you have a hire purchase or credit
sale agreement, your agreement is with the finance company
and if things go wrong, you must make sure they know about
your problems. Don't just tell the shop you went to for
the goods. Legally, it's the finance company that you're
dealing with.
Often, both the company who lent the
money and the shop you went to for the goods or services
have to help you if something goes wrong with what you've
bought. This is the case with loans that the retailer arranges
for you, or credit card purchases, where the goods cost
more than £100. This is very important because it
means that if the shop has closed down or gone out of business,
you can claim against the lender. This is known as 'equal
liability'.
If necessary, get some advice from your
nearest Consumer Protection/Trading Standards Department
or Citizens' Advice Bureau. They'll tell you how you should
go about making your complaint - but do it quickly. The
longer you leave it, the more tricky it becomes. If you
have problems, remember to put things in writing and always
keep copies of letters.
Sometimes, the
most carefully thought-out plans go wrong. You may find
yourself having trouble keeping up your repayments. If this
happens, don't just sit back and do nothing. You must let
the firm who lent you the money know straight away. Be honest
with them and discuss ways of sorting the problem out. They
may be willing to come to some arrangement with you. It
isn't a good idea to take out another loan to pay off a
credit agreement.
Once you start taking out loans to pay
off existing loans, things can get out of hand and you could
end up deeply in debt. Whatever the type of credit, if you
find that you're getting into difficulties, get advice early
on.
The Consumer Credit Act gives you the right to challenge
a credit agreement if you think the interest and other charges
are really sky-high, or what the law calls an 'extortionate'
credit agreement. But it's not easy to successfully claim
that an agreement's extortionate. If the lender is taking
a big risk, high charges may be justified. Get advice if
you think you're being charged far more than other similar
lenders would charge.
If you decide
to settle a credit agreement early, you can do so. You may
be entitled to a rebate (a refund) in interest but ask for
a settlement figure (a quote of what it will cost you ).
Then you can think it over and decide whether it's the best
thing for you to do with the money you have available.
If you buy something and then find out
that the person 'selling' it only had it on hire purchase.
The finance company (the owner) has the right to take it
back. You aren't the legal owner. The only exception to
the rule would be if you'd bought a car or motorbike and
were genuinely unaware that it was already on H.P.
With anything else, the finance
company can take the goods back and the only way you can
recover the money you've paid is to try and get it back
from the person who 'sold' the goods to you.
When
you take out a credit or long-term hire agreement. you are
making a commitment to repay what will often be a large
sum of money.
REMEMBER...
- Make sure you understand what you are taking on.
- Make sure you can afford it.
- If you run into difficulties,
never be afraid to seek advice and do it quickly.
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