defines key concepts such as credit and consumer credit contracts
requires you to disclose key information to debtors under consumer credit contracts and consumer leases
regulates methods of interest charging, fees and payments
allows for changes to a contract’s terms on the basis of unforeseen hardship to the debtor
regulates land buy-back transactions to provide rules about fees and ensure the disclosure of key information and independent legal advice to debtors
restricts creditors and lessors from making unreasonable requirements as to the terms on which a debtor or lessee is to take out or obtain credit-related insurance
sets up a penalty and enforcement regime, including enforcement by the Commerce Commission
provides for reopening oppressive credit contracts and banning orders against creditors who the Court decides are not suitable to be in the business of providing credit.
Definitions and key concepts.

Objectives of the Act

The Act is designed to provide transparency in dealings between creditors and debtors. The Act allows creditors considerable flexibility in the manner in which they comply with their obligations under the Act, while remaining strong against oppressive conduct by creditors.

Definitions and key concepts

What is credit?

The Act defines “credit” (Section 6) as being provided when, under a contract, a person grants a right to another person to:

defer payment of a debt, or
incur a debt and defer its payment, or
buy property or services and defer payment for that purchase (in whole or part).

What is a credit contract?

The Act defines a “credit contract” (Section 7) as a contract under which credit is or may be provided.

If the debtor and creditor have agreed on a combination or series of contracts, and in substance credit is provided under those contracts (even though none of the contracts on its own is a credit contract), the contracts are treated as a credit contract formed at the date the last contract in the series was made.

Credit contracts include:

a loan of money
a credit sale – a sale of goods or services where payment of the purchase price is deferred (previously commonly referred to as a hire purchase agreement)
a credit card or charge card facility used for purchases and/or cash advances
a bank overdraft
a conditional sale of either real or personal property.
Credit contracts do not include:
an ordinary contract for hiring or leasing goods
a layby sale
a lease of land
a block discounting or factoring agreement.

What is a consumer credit contract?

The Act defines a “consumer credit contract” (Section 11) as being a credit contract in which:

the debtor is a “natural person”, ie, they are not a company or incorporated society
the debtor enters into the contract for personal, domestic or household purposes,
and one or more of the following applies:
an interest charge or fee is, or may be, payable in return for the credit (this does not include default fees)
a security interest is taken in connection with the credit contract.

In addition, one or more of the following must apply:

the creditor is in the business of providing credit or provides credit in the course of a business
the debtor and creditor are introduced by a paid adviser or a broker.

Credit contracts that are not consumer credit contracts include:

contracts for the sale of property or goods where the agreed price must be paid within two months
where credit is provided because a person has overdrawn their bank account without an agreed overdraft facility
where the debtor is acting as a trustee for a family trust
contracts primarily for investment purposes.

Examples

The following examples illustrate the above rules:

Judith enters into a loan agreement with a bank to buy a family home. The contract is a consumer credit contract.
Garry enters into a loan agreement with a bank to buy an investment rental property. The contract is not a consumer credit contract as Garry’s purpose is for investment rather than for a domestic purpose.

What is a consumer lease?

A “lease” is a contract for the hire of goods. A typical lease is not a credit contract as it does not meet the definition in Section 6, ie, the lessee does not incur a debt or defer payment of a debt.

The Act defines a “consumer lease” (Section 60) as having been entered into primarily for personal, domestic or household purposes. The lease must also either be for a term of more than one year, or provide that the lessee has an option to buy the goods they are leasing.

Note: The definition of a consumer lease under the Act applies only when the lessor is in the business of leasing goods. This is discussed further in Consumer leases.

However, the Act considers a lease to be a credit contract when:

the payments under the lease equal or exceed the cash price of the goods being leased, or
the payments under the lease do not equal or exceed the cash price, but the lessee has an option to buy the goods for less than a reasonable estimate of their fair market value at the end of the lease.

Examples

The following examples of transactions that are leases and credit contracts assume the consumer enters into the transaction for personal, domestic or household purposes.

Debbie enters into a contract to hire a car. The car’s cash price is $20,000. The rental payments for the lease are $300 per month. The lease term is 36 months. The contract is for a term of more than one year but the total payments of $10,800 are less than the cash price, so the contract is a consumer lease.

Julie enters into a contract to hire a car. The car’s cash price is $20,000. The rental payments for the lease are $340 per month. The term of the lease is 36 months. At the end of the term Julie may buy the car for $12,000 – its expected market value. The contract is a consumer lease because Julie has an option to buy and the term is for more than one year, even though total payments are less than the cash price.

John enters into a contract to hire a car. The car’s cash price is $20,000. The rental payments for the lease are $330 per month and the final payment is $12,000. Total payments are $23,880. The term of the lease is 36 months. This contract is a credit contract as the total payments exceed the car’s cash price.

Sarah enters into a contract to hire a car. The cash price of the car is $20,000. The rental payments for the lease are $400 per month. The term of the lease is 36 months. At the end of the term Sarah may buy the car for $8,400. As the option price is substantially below the car’s expected market value ($12,000) the transaction is a credit contract.

Simon hires a television for $25 per week. The cash price is $2,500. The lease has no term and Simon may return the television and stop paying whenever he chooses without further obligation. Simon may also buy the television and his previous payments will count towards the purchase price. This contract, commonly known as a “rent to own”, is a consumer lease.

Nigel hires a television at $25 per week. The cash price is $2,500. The lease has no term and Nigel may return the television and stop paying whenever he chooses without further obligation. The contract is an ordinary hire contract and is regulated by the Act.

Key changes

Definition of consumer credit contract

A debtor must be a natural person.

The contract must be entered into primarily for personal, domestic or household purposes.

Interest charges, credit fees or a security interest must apply.

All consumer credit contracts are covered, regardless of the total amount of credit outstanding.

Borrowings primarily for investment purposes are not covered. Creditors may get a declaration from borrowers that the credit is for business or investment. If the lender has reason to believe the loan was really for consumer purposes, the declaration is ineffective.

Act reference

Part 2, Subpart 1

Disclosure requirements

Disclosure must be clear, concise and likely to bring the information to the attention of a reasonable person – they must not be misleading.
The Act provides for model disclosure statements set out in regulations. Although not compulsory, using the model disclosure statements will ensure that creditors have met their requirements under the Act.
Initial disclosure requirements may be contained in the credit contract or lease – including information such as the creditor’s full name and address, the initial unpaid balance, the credit limit, the method of charging interest, the interest free period if there is one, credit fees and charges, and the payments required.
There is an obligation for ongoing disclosure – continuing disclosure statements are required every 45 days for revolving credit contracts and at least every six months for all other credit contracts.
The Act makes some changes to the timing of disclosure, with various deadlines:

for making disclosure when the contract is first signed

to guarantors

when the interest rate changes

when the parties agree to changes

when the lender has the right to make unilateral changes.

Additional disclosure must be made on variation of the credit contract or lease, or when requested by the debtor.
Allows for electronic disclosure if consented to by the debtor.
Creditors not making proper disclosure cannot enforce contracts against debtors who fail to pay until they make correct disclosure.
Debtors can also seek statutory damages from creditors for the failure to comply.

Act reference

Part 2, Subpart 2

Interest charges and fees

Regulates how interest is to be calculated.
Requires fees to be “reasonable” (the fee should be matched to a cost incurred by the creditor).
When a fee is payable by a creditor to a third party and passed on to the debtor, it should match the specific costs incurred by the creditor.
Finance rate not required.

Act reference

Part 2, Subparts 5 and 6

Hardship provisions

Debtors have the right to request a variation of a credit contract if unforeseen circumstances cause hardship, eg, illness, injury, loss of employment or the end of a relationship.
The debtor can ask to extend the contract by reducing the amount of each payment or postponing payments, without incurring penalties.
A debtor cannot seek a hardship variation if they are in default on the credit contract.
A debtor can appeal to the Courts if a lender refuses their request.

Act reference

Part 2, Subpart 8

Prepayment

Regulates how prepayment is to be calculated.
A creditor must accept a full prepayment, and may only refuse part prepayments if allowed in the contract.

Act reference

Part 2, Subpart 7

Key terms

Advance
Annual interest rate
Broker
Cash price
Credit Sale
Creditor
Daily interest rate
Guarantor
Payment
Revolving credit contract
Security interest
Unpaid balance
Unpaid daily balance
Working day

This list sets out the key terms referred to throughout this information, and provides definitions as specified in the Act.

Advance An advance describes the value provided by the creditor to the debtor. It means any of the following:

money paid to the debtor or to a person specified by the debtor
any debt consolidation paid for by you on the debtor’s behalf
the cash price of any goods or services purchased by the debtor from you
the value of a cash advance or a purchase made on a credit card.

Annual interest rate A rate applied to the unpaid balance to derive the interest charge, expressed as an annual percentage.

Broker A person who in return for payment by either the debtor or the creditor assists a person in obtaining credit.

Cash price The lowest price at which a person is able to purchase property or services based on payment in full from the seller at the time the contract is made. Any “discount for cash” must be factored into the cash price. Where the creditor or lessor does not sell goods for cash, the cash price is the fair market value of those goods.

Credit sale A sale or provision of services in which payment of the whole or part of a purchase price is deferred to a later date, eg, a sale by instalments, hire purchase, or conditional sale will be a credit sale.

Creditor A person who provides credit under a credit contract. If the credit contract is assigned, the party receiving the assignment is also the creditor.

Daily interest rate The rate determined by dividing the annual interest rate by 365.

Guarantor A person who:

guarantees the performance of a debtor’s obligations under a contract, or
indemnifies a creditor against any loss they may incur in connection with the contract, or
assumes liability for performing the obligations of a debtor under a contract.

Payment In relation to a credit sale, includes a deposit or trade-in allowance.

Revolving credit contract A credit contract that anticipates multiple advances that are made when requested by the debtor. The contract does not limit the total amount that is advanced to you over the life of the contract. The definition includes “charge cards” that require the full outstanding balance to be paid at the end of each billing period.

Security interest An interest in property created by a transaction that secures payment or performance of an obligation under a credit contract or consumer lease. Note that the definition includes land as well as personal property.

Unpaid balance The amount owing under a credit contract at a particular time. The unpaid balance is the total of all debits minus all credits under the contract.

Unpaid daily balance The unpaid balance under a credit contract at the end of a particular day.

Working day Any day other than:

Saturday and Sunday
Waitangi Day
Good Friday
Easter Monday
Anzac Day
Queen’s Birthday
Labour Day
the period between 25 December and 2 January.

Transitional provisions

The Act applies to every credit contract, consumer lease, and guarantee made after the Act takes effect on 1 April 2005.

Contracts formed before this date will be governed by the law in force at the time.

You can choose to bring contracts formed before 1 April 2005 (governed by the Credit Contracts Act 1981 and Hire Purchase Act 1971) under the Act. You do not need the debtor’s consent to do this, but in doing so you must not increase any obligation they have in connection with the contract.

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