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Consumer advice

Your rights when buying on credit

Anyone who offers you credit must be licensed by the Financial Conduct Authority (FCA). Most consumer credit agreements are covered by the Consumer Credit Act 1974 and the Consumer Credit Act 2006. These agreements are called 'regulated agreements'. When you purchase goods or services on a regulated credit agreement, special rules apply. Any contract involving credit must be in writing, and must contain certain information required by law. The agreement must show the amount you are borrowing, the length of the agreement, the amount and frequency of payments, details of your cancellation rights (if applicable) and other forms of protection and remedies that may be available to you. It must also give the total charge for credit and the annual percentage rate (APR). Once a credit agreement has been signed there are limited rights to cancel the agreement. You could be bound for the duration of the agreement and there can be major consequences if you fail to meet the payments.

In the guide
Formalities of a credit agreement
Before signing a credit agreement
Continuing obligations of the creditor
Early settlement of a credit agreement
Defaulting on payments
Who is responsible when goods are faulty?
Can you cancel your credit agreement?
Credit card agreements
Hire purchase or conditional sale agreements
Credit reference agencies
Credit repair agencies
Further reading

Formalities of a credit agreement
Since 1 February 2011, creditors are required to assess your creditworthiness before agreeing to offer you a credit agreement or increasing the sum of credit. The creditor's decision whether to offer you credit, or increase or extend your credit, should be based on information provided by you and any necessary information gathered from credit reference agencies.

The Consumer Credit Act 1974 and the Consumer Credit Act 2006 set out specific requirements in relation to the information that must be supplied in writing before the agreement will be legally binding. They must contain the following information:

  • the amount you are borrowing
  • the length of the agreement
  • the amount and frequency of payments
  • details of your cancellation rights (if applicable) and other forms of protection and remedies available
  • the total charge for credit and the annual percentage rate (APR)

The agreement must be signed by both you and the creditor and you are entitled to a copy of the agreement. If this information is not given or is not signed by both parties the agreement could be unenforceable.

Since 1 February 2011, creditors must provide this information in a pre-contract information (PCI) form and you should be advised by the retailer to consider this information before signing the agreement. This is to ensure that you are fully aware of the cost of the agreement and your legal responsibilities. Creditors must ensure that you are provided with an adequate explanation of the proposed credit agreement (for example, the particular features of the agreements, the cost, and the consequences of failure to make payments) to enable you to assess whether the agreement is suited to your needs and financial situation. If you wish you can take the PCI away to review before agreeing to sign any credit agreement

You have no automatic right to credit and cannot insist on being given credit. Responsible creditors should only offer credit where it is appropriate to do so having regard to your creditworthiness. Most creditors will use credit reference agencies and/or credit scoring to decide whether to give credit. If you are turned down for a credit agreement, you may request a copy of the draft agreement and should be informed if the reason for the refusal was based on information received from a credit reference agency.

Before signing a credit agreement
Entry into a credit agreement should not be done without consideration. You could be committing yourself to paying large amounts of money for a long time. Before you sign, consider the following:

Can you afford it? Look at the APR and length of agreement. Consider the total amount you will be paying over the life of the loan as well as the monthly payment. Ask for a written quotation, take it home and consider it carefully.

Can you buy the goods or services cheaper elsewhere?

You don't have to arrange the loan through the retailer. You could ask your own bank or seek other sources of finance. Compare the interest rates and terms as they may be more favourable

Have you been offered payment protection insurance (PPI) to cover the loan? Are you likely to need it? Does the payment protection policy meet your circumstances and when will the policy pay out? Many policies, for example, will not cover anyone who is self-employed or will not cover some medical conditions. Ask for a copy of the policy and read the terms carefully. Check that what the salesperson told you verbally is actually written in the policy document.

Do not take out a loan secured on your property without considering the consequences. If your circumstances change and you cannot keep up the payments, you could lose your home.

Continuing obligations of the creditor
A creditor, in a regulated fixed sum credit agreement, is legally obliged to give you a statement of account within a year, the year beginning with the day after the day on which the agreement is made. You may also be entitled, if applicable, to receive further statements at intervals of not more than one year. If a creditor does not comply with this requirement, he cannot enforce the agreement during non-compliance, and you would not be obliged to pay interest during this time.

A creditor in a running account credit agreement (such as a credit card) must issue statements to you, setting out specified information, at intervals of not more than 12 months.

Early settlement of a credit agreement
It may be possible to settle a credit agreement early and to receive a rebate on the credit charges. The existing right to settle a credit agreement early has been extended to a right to make partial early settlements at any time. However, a creditor may claim compensation in certain circumstances provided that this is fair and objectively justified, and does not exceed 1% or 0.5% of the amount repaid early.

Defaulting on payments
There can be major consequences if you fail to meet payments under a credit agreement. You will be in breach of contract to the finance company and the company could terminate the agreement, demand early payment of the sum owing or even, in some cases, repossess goods or your home.

Information in relation to failed payments will be noted on your credit record and this may affect your ability to obtain credit in the future. When goods are repossessed, you may find that you still owe money to the creditor, which it may pursue through legal action.

A creditor must give you a notice of sums in arrears, plus an arrears information sheet at intervals of six months until you are no longer in arrears, or until a judgment is made regarding the amount owed. A creditor cannot enforce an agreement during the time it fails to comply with this requirement and you would not be liable to pay interest during this time.

Before any enforcement action can be taken against you, the creditor must send you a default notice and default information sheet, giving you the opportunity to meet your payment within a specified time. It must set out what action it intends to take if you fail to make the payment.

Never ignore a default notice . Seek advice immediately if you cannot make the payments. There may be other options open to you in order to limit your liability but these options may be subject to time restrictions.

Who is responsible when goods are faulty?
This depends on the type of credit agreement. The heading on the top of your agreement will tell you what type of agreement you have.

HIRE PURCHASE
This type of credit is commonly used to fund the purchase of vehicles. When you agree to buy a car on hire purchase, the garage sells the car to the creditor (finance company) which, in turn, hires the car to you with an option to purchase. The creditor owns the car and ownership does not pass to you until the last payment has been made. During this time, you cannot sell the vehicle without the creditor's permission as you are not the legal owner.

You are not bound to purchase the vehicle as the agreement gives you a right of termination under certain conditions (see below).

Your contract is with the creditor and not the supplier of the goods. It is, therefore, the creditor that has a contractual responsibility to you if the item is faulty. If you have a complaint, your letter should be sent to the creditor, with a copy to the supplier. See our leaflet 'Writing an effective letter of complaint' for template letters you can use should this situation arise.

CONDITIONAL SALE
This is similar to hire purchase and, again, the creditor (not the supplier) has direct contractual liability if goods are faulty.

YOU HAVE ARRANGED YOUR OWN BANK LOAN
Your bank has no responsibility for the quality of the goods. It has provided the funds to make the purchase but is not directly involved in the sale. If the goods are faulty you may have a claim against the retailer, the manufacturer, or under a guarantee/warranty covering the goods (see our leaflets 'Buying goods - your rights' and 'Guarantees and warranties').

PERSONAL LOAN/CREDIT AGREEMENT ARRANGED BY THE RETAILER
In this type of agreement, both the retailer and the creditor could be liable if goods are faulty. Your claim against the retailer for defective goods would be under the Sale of Goods Act 1979 or the Sale and Supply of Goods to Consumers Regulations 2002.  If your dispute is in relation to the services you have received, both the supplier and the creditor could also be liable if the services are not provided to a reasonable standard under the Supply of Goods and Services Act 1982. The claim against the creditor could fall under section 75 of the Consumer Credit Act 1974 if you can prove that the retailer or supplier is in breach of contract or has misrepresented the goods or services to you. This is called 'equal liability'.

Your letter of complaint should be sent to both parties. This equal liability only applies if the cash price of the goods or services is more than £100 and less than £30,000. In the event of a legal claim, you could sue the retailer or supplier, the creditor or  both jointly and this is often referred to as 'joint and several liability'.

If the claim exceeds £30,000 and is less than £60,260 and the contract was formed after 11 June 2010, then you may be able to claim against the creditor under section 75A of the Consumer Credit Act 1974. This entitles you to pursue the creditor but only if the original retailer or supplier has become insolvent, does not respond to you when you complain or you have not come to a resolution after taking reasonable steps to pursue the trader.

It should also be noted that section 75A only applies if a contract has been breached - not for a misrepresentation by the retailer or supplier.

YOU HAVE PAID BY CREDIT CARD
As credit cards are easy to use and are accepted by the majority of retailers in both the UK and abroad, they are the most commonly used type of credit. If goods are faulty, the situation is the same as above. The credit card company and the retailer could be equally liable in the event of a breach of contract or misrepresentation and your letter of complaint should be sent to both parties.

This does not apply to charge cards or debit cards.

Can you cancel your credit agreement?
From 1 February 2011, you are able to withdraw from most credit agreements within 14 days of the agreement being made, or, if produced later, when you receive a copy of the agreement or are notified of the credit limit.

However, this right to withdraw applies only to the credit agreement, not the overall contract which means you are still liable to purchase the goods or services and will have to find other ways to pay for them. For general information on the purchase of goods or services, please see our leaflets 'Buying goods - your rights' and 'Buying services - your rights'.

SIGNED ON TRADE PREMISES
You may have a very short window of opportunity to exercise an additional right to withdraw from the deal if the creditor has not yet signed their part of the agreement. In these circumstances, you should telephone the creditor immediately to establish whether the agreement has been signed. If not, inform them you wish to withdraw. Make a note of what was said and the name of the person you spoke to. You should then confirm your withdrawal in a letter. Send it by recorded delivery and keep a copy.

Once you have withdrawn, this will also cancel any agreement for the purchase of the goods or services and you are entitled to a refund of any deposit you have paid. You should be aware however that many retailers are entitled to sign credit agreements for, and on behalf of, the creditor and, therefore, you would not be able to withdraw as it would be binding when signed by the retailer. In this scenario you are still able to exercise your 14 day cooling off rights to cancel the credit agreement, but you will still be obliged to continue with the purchase of the goods or services and will have to make alternative arrangements for payment.

SIGNED AT HOME
You have an additional right to a withdraw from the credit agreement if you signed your credit agreement away from the retailer's premises - for example, you signed at home and you talked to the seller about the deal face-to-face (rather than only on the telephone). All credit agreements must contain a notice of your cancellation rights.

When you have signed the agreement, it will be sent to the creditor for an indication of the company's acceptance of the deal. The creditor will do this by adding an authorised signature to the agreement and sending you a second copy through the post. Prior to the acceptance of the agreement you are able to withdraw. If you have not been given notice of your cancellation rights, the agreement is unenforceable. Keep copies of any correspondence you send and obtain proof of postage.

When an agreement is terminated in this way it will automatically cancel any linked transaction for goods and services and you are entitled to have any deposit you paid returned. If you do not withdraw from the agreement before the company has accepted the agreement you may still  terminate the agreement by the end of the fifth day in which your received the signed copy of the agreement.  This termination will also cancel any linked transaction for the goods and services. In addition you will have your 14 day cooling off rights from the date you receive the signed copy of the agreement but if your cancel using the additional time period that the 14 day cooling off period provides, you will still be obliged to continue with the purchase of the goods or services and will have to make alternative arrangements for payment.

If you have entered and then cancelled an agreement, you do not have to pay interest on money you may have already received if it is returned in full within a month of cancellation or, if the credit is repayable in instalments, before the date of the first payment.

If you have received goods financed through an agreement that you have withdrawn from (as opposed to cancelled under your 14 day cooling off rights) you are obliged to take reasonable care of them and not dispose of them until they are returned to the supplier. You should also be made aware that you may have cancellation rights under the Cancellation of Contracts made in a Consumers Home or Place of Work etc Regulations 2008. These Regulations give consumers, a seven day cooling off period for any reason see our leaflet 'Your rights to cancel when buying at home').

Where the borrower has the new right of withdrawal from a credit agreement under the 14 day cooling off period, this right will apply instead of the cancellation rights under the 2008 Regulations (although the 14 days only applies to the credit agreement, not the goods or services, which will still have a seven day cooling off period).

IF THE COOLING OFF PERIOD HAS EXPIRED
Once you have signed the credit agreement and the cooling off period has ended, any further rights you may have to cancel your agreement will be included in your contract and will depend on the type of credit you took out.

Credit card agreements
Credit card agreements can be cancelled by writing to the creditor and making arrangements to repay any money you owe.

Hire purchase or conditional sale agreements
These can be terminated at any time by giving notice that you wish to return the goods and cancel the agreement. This may be an expensive option as you will be liable for half the total amount payable under the agreement at the time of cancellation, as well as any arrears outstanding and compensation if any damage has been caused to the item. You may also have taken out additional insurances which will be shown separately on the agreement. Once you have terminated, you could still be liable for the insurance premiums. This should be detailed on your hire purchase agreement.

Credit reference agencies
The main credit reference agencies collect and store information about a person's financial situation. These agencies do not keep 'blacklists' or give opinions about whether or not you should be given credit. They provide factual information which includes details of county court judgments, bankruptcy, any property repossessed, any other credit accounts you have, and a record of everyone who has requested a credit check on your file. You can check the information held by the credit reference companies by writing to them, asking for a copy of your file and enclosing the required fee. You can ask that incorrect information be corrected, but you cannot ask for correct information to be removed.

Credit repair agencies
Beware of companies which promise to repair your credit record for a fee. They have no special powers to do anything you could not do yourself.

Further reading
The Department for Business, Innovation and Skills (BIS) has published guidance on the consumer credit regulations. However, please note this is a highly detailed document that is not primarily aimed at consumers.

Please note
This leaflet is not an authoritative interpretation of the law and is intended only for guidance. Any legislation referred to, while still current, may have been amended from the form in which it was originally enacted.

For further information please contact the Citizens Advice consumer service, which provides free, confidential and impartial advice on consumer issues. Visit www.adviceguide.org.uk or call the Citizens Advice consumer helpline on 03454 040506.

Key legislation
Consumer Credit Act 1974
Sale of Goods Act 1979
Supply of Goods and Services Act 1982
Sale and Supply of Goods to Consumers Regulations 2002
Consumer Credit Act 2006
Cancellation of Contracts made in a Consumer's Home or Place of Work etc Regulations 2008
Consumer Credit (EU Directive) Regulations 2010
Consumer Credit (Total Charge for Credit) Regulations 2010
Consumer Credit (Disclosure of Information) Regulations 2010
Consumer Credit (Agreements) Regulations 2010
Consumer Credit (Advertisements) Regulations 2010

Last reviewed/updated: September 2013

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