Consumer credit contracts – overview

This page provides an overview of what a consumer credit contract is and explains the rules and consumer protections that apply to this type of contract.

Note: New Zealand credit law has changed. This information relates to contracts entered into before 6 June 2015. We are progressively updating our guidance to reflect these changes.

The Credit Contracts and Consumer Finance Act (CCCF Act) covers a range of transactions where people are given credit for personal use, such as through a mortgage, credit card, arranged overdraft, personal or cash loan, or pawn broking pledge.

What is credit?

A person has been given credit if they have been given the right to:

  • put off paying an existing debt
  • incur a debt and put off paying it
  • purchase goods or services and put off paying for them – this is typically known as a credit sale as the borrower usually gets the goods or services before paying for them in full and pays them off over time.

Under the CCCF Act, any borrower who is given credit has entered into a credit contract and has specific rights and obligations.

What is a consumer credit contract?

A consumer credit contract is a type of credit contract where the borrower:

  • is a private individual (in other words, they are not a company or incorporated society)
  • is entering the contract primarily for personal, domestic or household purposes (as opposed to primarily for business or investment purposes)

and

  • may have to pay interest or a credit fee, or provide a security interest.

In addition, the lender must either:

  • be in the business of providing credit (such as a finance company or bank) – although lending does not have to be their only business or main business
  • be in the practice of providing credit as part of their business (such as a car dealer)
  • make a practice of entering into credit contracts on behalf of someone else

or

  • have been introduced to the borrower through a paid advisor or broker.

Exclusions

Some credit contracts aren’t consumer credit contracts, even if these conditions are met. A contract is not a consumer credit contract where:

  • it is a credit sale and the borrower has to pay in full for the goods or services within two months
  • someone has overdrawn their bank account without having an agreed overdraft facility on the account
  • the borrower is acting as trustee for a family trust.

However, these transactions are still credit contracts and they can still be re-opened by the courts if they are oppressive. You can read more in our fact sheet Oppressive contracts – protections for borrowers.

What’s a credit fee?

An additional charge a lender may add to the amount they have loaned under a credit contract, such as prepayment fees or establishment fees.

 

What’s interest?

An amount a lender charges a borrower for the use of their money. Interest is calculated by applying a rate to the amount a borrower owes.

 

What’s a security interest?

An interest in goods or property that lets lenders secure repayment of a contract by selling the goods or property and using the proceeds to repay the loan

What rules apply to consumer credit contracts under the CCCF Act?

There are specific rules that apply to lenders under consumer credit contracts.

  • Disclosure: Lenders must give borrowers key information about the terms of the contract, and this must be accurate and understandable.
  • Interest charges: While lenders have the right to charge interest, and there is no cap on what they can charge, there are rules around how they do so.
  • Payments: Lenders must apply repayments according to the rules set out in the CCCF Act, and must tell borrowers if they will accept extra part repayments. Borrowers have the right to fully repay a contract earlier than stated in the contract.
  • Fees: There are rules about the fees that lenders can charge. In particular, credit and default fees must be reasonable, relate to actual costs and losses, and meet reasonable standards of commercial practice.
  • Credit-related insurance, extended warranties and repayment waivers: Lenders can’t unreasonably require borrowers to buy any of these services in connection with a consumer credit contract.
  • Cancellation: Borrowers have a “cooling off’ period after entering into a consumer credit contract when they can change their mind.
  • Hardship: Borrowers can ask their lender for temporary relief or relaxation in the terms of their contract if they suffer an unexpected hardship and are up-to-date with their repayments.
  • Oppression: Borrowers and guarantors are protected from oppressive contracts and from oppressive behaviour by lenders.

These rules, including protections for borrowers, are detailed in our series of fact sheets available on our Consumer Credit Fact Sheets page.

What if a borrower enters a credit contract for business purposes?

If a borrower claims a contract is a consumer credit contract, it is presumed that it is, unless the lender can prove otherwise.

Because of this, lenders sometimes require borrowers to make written declarations before they enter a contract saying that the credit is being used primarily for business or investment. If a borrower makes a declaration like this, the contract will be a credit contract rather than a consumer credit contract. This means the CCCF Act won’t apply except if the credit contract is oppressive. Borrowers who sign business purpose declarations will lose all of the other consumer protections under the CCCF Act.

But, a business purposes declaration will only be effective if:

  • the declaration is made before the borrower enters into the contract
  • the declaration is contained in a separate written document

and

  • the borrower has confirmed they have read and understood the declaration.

If a borrower signs a statement saying that the credit is for business purposes, and it isn’t, and the lender (or whoever took the declaration) knows this, then the declaration is ineffective. The contract will be a consumer credit contract.

Lenders and borrowers

 

The CCCF Act uses a number of different terms to describe lenders and borrowers, depending on the transaction:

  • consumer credit contracts – creditors and debtors
  • consumer leases – lessors and lessees
  • buy-back transactions – transferees and occupiers.

In these fact sheets we use the terms lender and borrower to talk generally about credit transactions, but use the specific terms for consumer leases and buy-back transactions where it makes things clearer.

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