If the contract allows a creditor to decline an extra payment and one is received, the creditor can:
- accept it and credit it to the debtor’s account as soon as practicable; or
- decline it and return it to the debtor as soon as practicable; or
- credit it according to the payment schedule specified in the contract.
Part Prepayment
A creditor may charge a reasonable fee for part prepayment if the consumer credit contract allows it and the fee is properly disclosed.
A fee will be unreasonable only if it exceeds a reasonable estimate of a creditor’s loss arising as a result of the prepayment. The fee may include the creditor’s average reasonable administration costs arising from part prepayments under similar types of contract.
If any fee is payable upon part prepayment, the fee must be disclosed at the time the contract is entered and if the amount is not able to be ascertained then the method of calculating the fee must be set out.
Full Prepayment
A debtor is entitled to repay in full what they owe under a consumer credit contract at any time. A consumer credit contract must not prohibit full prepayment. A contract which does prohibit full prepayment will breach the CCCF Act and may also breach the Fair Trading Act.
A creditor cannot require a debtor who is prepaying in full to pay more than:
- the unpaid balance at the time of prepayment; this includes the interest and charges that would ordinarily accrue or be payable under the contract as at the date of prepayment; and
- if the contract expressly authorises it, an extra charge to cover administrative costs incurred as a result of the prepayment; and
- if the contract expressly authorises it, a creditor may be able to charge a fee that does not exceed a reasonable estimate of their loss.
Where consumer credit insurance is financed as part of the agreement this must be rebated and deducted from the amount to be paid. The CCCF Act sets out rules for calculating this rebate.
Calculating Loss on Full Prepayment
The CCCF Act’s regulations set out a ‘safe harbour’ formula which if used correctly is presumed to give a reasonable estimate of a creditor’s loss upon full prepayment. A creditor may use other methods to work out their loss, but will need to be able to show that their method also produces a reasonable estimate of loss. The contract must clearly set out the procedure the creditor intends to use in the initial disclosure statement.
The safe harbour formula is designed to produce the difference in two future payment streams. One is the cashflow anticipated under the contract being repaid. The other is the cashflow based on a replacement contract at the interest rate prevailing at the time of the prepayment for the remainder of the fixed term of the original contract. The two payment streams are adjusted to a present value before the difference is calculated. The concept of assessing loss using the safe harbour formula is that the creditor mitigates its loss by relending the repaid funds.
However, the CCCF Act recognises that this is not the only means of assessing loss and creditors may use other appropriate procedures.
Rebate of Insurance Premiums
If a consumer credit insurance contract is financed under a consumer credit contract the debtor must be provided with a proportional rebate on the premium if and when they fully prepay the contract. The CCCF Act sets out a formula, based on the Rule of 78, that must be used to calculate the rebate. This formula gives the minimum rebate to be credited to the debtor.
The safe harbour formula and the formula for calculating a rebate are available at www.legislation.co.nz under Credit Contracts and Consumer Finance Act Regulations
Definitions
PART PREPAYMENT An extra payment towards a loan that is not required under the credit contract.
FULL PREPAYMENT An extra payment towards a loan that pays it off in full before the due date specified in the credit contract.
Lenders and Borrowers
The CCCF Act uses a number of different terms to describe lenders and borrowers, depending on the nature of the transaction.
- Consumer credit contracts – creditors and debtors.
- Consumer leases – lessors and lessees.
- Buy back transactions – transferees and occupiers.
For the purposes of these fact sheets the terms creditor and debtor are used when referring generally to credit transactions, but the specific terms are used where relevant.
