Tips for avoiding loans and credit traps

Ow! Paying more than you need to when you borrow money or buy goods on credit can hurt you in the wallet. Avoid the pain of loan and credit traps by being informed when you borrow money or buy goods on credit.

The new Credit Contracts and Consumer Finance Act (CCCFA), which came into effect on 1 April 2005, helps you by providing better protections for consumers. In our A Word of Advice article, Watch out loan and credit traps: new credit law 1 April, we outlined the new law. This article provides some of the key information you should know before you borrow money or buy goods on credit.

Did you know…

Buying goods on credit may cost you more than the cash price

The total you repay for goods on credit is likely to cost more than the cash price because you may also have to pay:

• extra costs for arranging the credit, such as documentation fees, administration costs or booking fees (and these fees must be reasonable)
• interest on the money you borrowed.

We suggest that you find out how much more you’ll be paying for goods on credit before you decide to sign a contract. The lender is required to tell you this information.

There’s no limit on the interest rate you can be charged

The new law doesn’t limit the rate of interest lenders can charge you. However, it does set out how they must calculate interest. This must be explained in your contract. It pays to compare the rates of a number of lenders before signing a contract.

You can repay your credit contract early

You can pay off the full amount owing on your credit sale or loan contract at any time (called “full prepayment”). Some contracts may allow you to pay off some of the balance (called “part prepayment”). However if you make a prepayment, the lender may charge you a fee to cover their costs.

The lender has to give you information about your credit contract

The lender must give you key information that will assist you to understand your rights and obligations under a credit contract. It must be in writing in the form of a “disclosure statement” (see Word Watch below for more information).

There are things you can do if you can’t keep up payments.

If you can’t keep up payments, contact the lender as soon as possible. In some cases you may be able to change the contract terms. You can apply to spread the payments over a longer period or to postpone payment dates.

Lenders can take back the goods or your security if you don’t keep up with your payments.

If you’re asked to provide security, don’t list goods that are worth more than the loan, as the lender can seize your security if you don’t keep up your payments. See “secured loan” in Word Watch below for more information.

Word watch

Some terms explained:

Credit: the amount of money you’re borrowing. Credit can be a loan, buying goods that you’ll pay off later or using a bank or store credit card to buy goods and services.

Credit contract: a contract that sets out the terms and conditions of the credit sale or loan.

Credit sale: A type of credit contract where you buy goods with the right to use them and pay them off later – eg, by making monthly payments (instalments). This is the new term for the old “hire purchase” agreement.

Disclosure statement: written information about your credit contract – eg, payment information, interest rate, cancellation rights.

Lender: the company or organisation providing you with credit – eg, sellers, finance companies, banks, money lenders.

Loan: money you borrow from a bank, finance company or other lender. A loan is a form of credit contract.

Secured loan: A loan where the lender asks you to list goods you own – eg, a car or household goods – as security for the loan. If you fail to repay what you owe, the lender may seize and sell the goods to pay off your debt to them.

Want more information?

Visit our website (see Consumer Information section, Credit Issues). Or contact your local Citizens Advice Bureau (CAB). You’ll find your nearest bureau listed under “C” in the White Pages. Alternatively you can call the CAB’s freephone number 0800 FOR CAB (0800 367 222) to be connected to your nearest bureau.