Agreements under the Consumer Credit Act 1974

1.0 Introduction

The Consumer Credit Act 1974, which governs personal loans and other credit agreements in UK, is regarded as a consumer protection law. Under this Act it is mandatory for certain businesses to apply and get consumer credit licenses. This Act is intended to protect individuals who has availed credit up to a limit of £ 25,000. (Department for Business)[1] Any appeal in respect of disputes under the Consumer Credit Act is to be made to the Office of Fair Trading (OFT). According to Chapter 39 Consumer Credit Act of 1974 is established for the protection of consumers and the Act is intended to replace the present enactments monitoring the transactions of moneylenders, pawnbrokers and hire-purchase traders.[2] The Act regulated all other related matters to the consumer credit. The Chapter further provides that the Act and the provisions thereof are to be administered by the Director General of Fair Trading for licensing of the businesses and other control. “The Consumer Credit Act 1974 requires most businesses that offer goods or services on credit or lend money to consumers to be licensed by the OFT. Trading without a licensing arrangement is a criminal offence and can result in a fine and/or imprisonment.”[3]

2.0 Salient Provisions of the Act:

Some of the important elements of the Consumer Credit Act 1974 are:

• It is obligatory for any business entering into credit agreements with the customers must apply for and get a license from the Office of the Fair Trading and on obtaining the license the business can be regarded as a licensed credit broker.
• It is mandatory that the customer is made aware of the complete details of the credit agreement including interest rates.
• The person offering credit must provide the customer with the precise details of the transaction being entered into. The customer must be informed of the cash price of the purchase, calculations to show how the credit price is worked out, details of the monthly commitments of the customer and what the transaction finally costs the customer.
• It is necessary that all the agreements should be reduced in writing.
• The agreement should contain all the details of the exact and real interest rate. It should contain the Annual Percentage Rate (APR) which is the effective rate of interest the customer will end up paying on the loan and this rate includes the one time processing and other fees. In effect the APR is the total cost of credit to the customer spelt out as an annual percentage of total value of credit.
• The Act requires that the customer should be allowed a cooling-period during which the borrower can rethink about entering into the credit arrangement and even cancel the agreement. The cooling off period starts from the day the customer signs the agreement and the number of days varies depending on the goods and services covered by the agreement.
• The consumer credit Act ensures that the borrower gets a rebate if the loan is paid off early.[4]

3.0 Regulated Consumer Credit Agreement:

Section 8 of the Consumer Credit Act defines a consumer credit agreement as “a personal credit agreement is an agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides the debtor with credit of any amount.” (Swarb.co.uk)[5]

Under section 9 the term credit includes all transactions involving a cash loan and also any other form of financial arrangements. Under section 12 an agreement between the debtor-creditor-supplier becomes a regulated consumer credit under the circumstances specified in section 11(1) (b). Moreover the agreement to become a regulated one must be made by the creditor under arrangements which were existing at the time of entering into the agreement or the agreement is made in contemplation of any possible arrangement between the creditor and the supplier. Under Section 11

“(1) A restricted-use credit agreement is a regulated consumer credit agreement-

(a) to finance a transaction between the debtor and the creditor, whether forming part of that agreement or not, or

(b) to finance a transaction between the debtor and a person (the ‘supplier’) other than the creditor, or

(c) to refinance any existing indebtedness of the debtor’s, whether to the creditor or another person,

and ‘restricted-use credit’ shall be construed accordingly.”[6]

4.0 Different Types of Consumer Credit Agreements:

There are different types of financial arrangements that are covered under the Consumer Credit Act, 1974. Some of the important credit agreements are:

4.1 Hire Purchase:

A hire purchase is usually resorted to buy a car or other vehicle. Under a hire purchase agreement the car owner sells the car to the company that provides the finance and in turn the financing company hires the car to the borrower with an option to purchase. The ownership in the car does not pass until the last payment under the agreement is paid by the borrower.[7]

4.2 Conditional Sale Agreement:

This kind of an agreement describes a sale contract where the buyer pays by installments. However the contract specifies that the title to the customer will pass only when a particular condition has been met. The condition will be similar to that of the hire purchase that the title will be transferred on the payment of the last installment.[8]

These agreements are similar to the hire purchase agreements with the only exception that the finance company has the direct liability in case the goods are found to be of inferior quality or having some defects. The supplier does not carry any responsibility for the faults in the goods.

4.3 Personal Loan/Credit Agreements arranged by the Retailer:

“When a seller allows a purchaser to pay by credit and does not state in the contract when the title to the goods passes to the purchaser, the agreement is known as a personal credit agreement. Examples of these agreements are purchases by credit cards, charge cards (including store cards), bank loans (which may also be used generally to reduce other borrowings), via catalogues etc.”[9]

Under this type of agreements the liability for the faulty goods lie either with the retailer who arranged the loan or the finance company. The borrower shall have the claim under the Sale of Goods Act 1979 or the Sale and Supply of Goods to Consumers Regulations 2002. The borrower can also have right to make a claim against the finance company under sec 75 of the Consumer Credit Act 1974.

4.4 Credit Card Agreements:

 The credit cards are the most popular types of credit that are being used most of the people worldwide in the present economic conditions. It is not possible to cancel the credit card agreements when signed at the trader’s premises and when both the borrower and the credit card company have signed the documents. As the documents are signed they become leally binding on both the borrower and the credit card company. However the borrower shall have the statutory right to enjoy the cancellation period if the borrower has signed the credit agreement away from the trader’s premises. The example in this case is the signing of the credit card agreement at home. But the agreement should contain a notice of our cancellation rights.

4.5 Lease Hire Agreements:

Under the lease hire agreements the customer will be able to use the goods by paying the lease charges under the terms of lease agreement, while the ownership and title is retained by the owner, who is responsible for the repair and maintenance of the asset. The lease hire agreement normally relates to the plant and machinery.

5.0 Statutory Requirements for a Valid Credit Agreement:

A credit agreement to be considered as valid under the Consumer Credit Act 1974 should “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 available. It must also give the total charge for credit and the annual percentage rate (APR).” (H&F)[10]

The agreement should also specifically include among other things the following provisions:

Mention of the Consumer Credit Act 1974

The foremost requirement for a consumer credit agreement to become valid under the Consumer Credit Act is that the agreement should show conspicuously that the agreement is regulated by the provisions of the said Act.

Amount of Credit;

The agreement should clearly indicate the exact amount of credit covered by the agreement.

Repayment:

The agreement should contain specific conditions indicating the amount that the borrower needs to repay under the agreement. The repayment conditions must also indicate the calculations by which the monthly or other periodic repayment amount is arrived at.

APR

The Annual Percentage Rate is the all inclusive interest rate which is contracted between the creditor and the borrower. The APR was introduced by the Consumer Credit Act 1974 to enable the consumer to compare the terms of the loans being offered by different creditors. The APR must be published for all regulated loans under the Act. In the agreement the APR should be prominently displayed than any other rate.

Interest Rate

The agreement should also indicate the specific interest rate agreed to between the borrower and the creditor. The exact balance or the amounts on which the interest rate would be applied should be specifically mentioned in the agreement to make it a valid one under the Consumer Credit Act 1974.

Utilization of Repayment Amounts
In order to become valid under the Consumer Credit Act 1974 the agreement should indicate the manner in which the amount being repaid by the borrower should be mentioned. The agreement should clearly state that out of the amounts being repaid by the borrower, the amount that will be apportioned towards interest and the amount that will be taken to the interest portion should be clearly specified.

Total Charge to Credit

The agreement should specify the total amount that will be charged to the credit agreement with the borrower. This charge to the credit should include the additional costs that the customer may have to undertake to pay under various circumstances like late repayment, non-payment of interest, penal charges and other handling and processing charges.

In addition to the above general terms in accordance with the Consumer Credit Act 1974, the agreements should follow a specific form and content of documents embodying regulated consumer credit agreements. In particular the agreement should make the borrower aware of:

• The rights to which the borrower is entitled under the Act and also the duties conferred on him by the agreement.
• The amount and rate of the total charge for credit
• The protection available to the borrower under the Act and also the remedies that he can look for in case of any issues arising.
• Any other matter which can be considered desirable for the borrower to know about with respect to the agreement. (

Similarly a regulated agreement will be considered as not properly executed under the Act unless:

• “A document in the prescribed form containing all the prescribed terms is signed by the debtor and the creditor;
• The document embodies all the terms of the agreement, other than implied terms; and
• The document is, when presented to the debtor for signature, in such a state that all its terms are readily legible.” (Check My Agreement)[11]

 References:

[1]Department for Business ‘Consumer Credit Act, 1974’

http://www.dti.gov.uk/consumers/consumer-finance/credit-act-1974/index.html

[2] Ezine Articles ‘Consumer Credit Act in UK’

http://ezinearticles.com/?Consumer-Credit-Act-in-UK&id=387401

[3] Office of Fair Trading ‘Consumer Credit Act’

http://www.oft.gov.uk/advice_and_resources/resource_base/legal/cca/

[4] Consumer Education ‘Consumer Credit Act 1974’

http://www.consumereducation.org.uk/money/english/credit/03.htm

[5] Swarb.co.uk ‘Consumer Credit Act 1974’

http://www.swarb.co.uk/acts/1974Consumer_CreditAct.shtml

[6] Swarb.co.uk ‘Consumer Credit Act 1974’

http://www.swarb.co.uk/acts/1974Consumer_CreditAct.shtml

[7] Money Control.com ‘History of Credit’

http://www.moneycontrol.com/cards/cardsinfo/credith.php

[8] Assets Subject to Credit

http://www.insolvency.gov.uk/freedomofinformation/technical/casehelpmanual/A/AssetsSubjectToCredit.htm

[9] Assets Subject to Credit

http://www.insolvency.gov.uk/freedomofinformation/technical/casehelpmanual/A/AssetsSubjectToCredit.htm

[10]H&F ‘Your Rights When Buying on Credit’

http://lbhf.gov.uk/Directory/Business/Trading_standards/Debt_and_money/62254_Debt_and_Money.asp?classification=Eng;Cons;Adv;OthPrb&id=122504

[11]Check My Agreement ‘Do you have a Credit Agreement?’

http://www.checkmyagreement.co.uk/faq.html#7