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Loans and Hire Purchases

Loans and Hire Purchase Agreements

Sometimes, if you don’t have enough money, you may need to take out a loan or buy items on hire purchase agreements (also legally known as credit sales).

There are some special protections in the law for consumers when they enter into a credit contract. This section briefly explains some of these protections.

What is a loan?

A loan is a contract with a ‘lender’, where the lender agrees to lend you money that you will need to pay back later, usually in regular payments over time. Almost all loans include interest, which means you often end up paying back lots more than you borrowed. Sometimes you may have to give security for taking out a loan.

What is interest?

When you borrow money from a lender, there is usually a condition that you have to pay back more than you had borrowed. The extra percentage you have to pay back to the lender above of the amount you had borrowed is called interest. When borrowing money, the lender will tell you what percentage more you will have to pay and whether it is fixed or floating (meaning it can vary in percentage).

When you’re repaying your loan, you will be repaying both amount you borrowed and the interest rate at the same time.

What is security for a loan?

Sometimes when you get a loan, you have to agree to give something you own as ‘security’. If you don’t repay the loan, the lender can sell the security to get their money back. One example is a pawn shop. To get a loan from a pawn shop you have to give them a valuable item like a ring. When you pay back the loan, they give you the item back. If you don’t repay the loan or don’t repay it in the agreed time frame, they can sell the item, even if you have paid a part of the loan back. Always understand the terms of your loan before agreeing to it.

What is a hire purchase agreement?

A hire purchase agreement is like a loan, except the seller sells and gives you the item you want to buy, instead of lending you the money. If you stop paying before you’ve paid the item off, the seller can take it back and keep all the money you’ve already paid. Note that sometimes even if the hire purchase is “interest fee”, there may be administration costs involved which means you’d still be paying more than if you just purchased the item without a hire purchase agreement. Please read your hire purchase agreement carefully and know all the fees before agreeing to it.

I no longer want the loan or the hire purchase agreement, can I cancel it?

Whenever you agree to a loan or a hire purchase agreement, the lender has to give you written information explaining all the important information, fees, charges and interest that you have to pay, and what you have to do to get out of the agreement early.

Before they give you this information, you can cancel the contract at any time. You also have a short number of days to cancel after you receive the information depending on how you received the information.

How many days do I have to cancel a loan or a hire purchase agreement after the seller has provided me with all the information?

After you’re given all the important information in relation to your loan or hire purchase agreement, you have:

  • 3 working days if they hand the information to you directly, or
  • 5 working days if you get it electronically (like by email), or
  • 7 working days after it was posted, if you get it by mail.

You need to tell the lender in writing that you’re cancelling the contract. You then have to pay back the loan or return the item in 15 days. You might have to pay some reasonable cancellation fees and interest.

Can I get out of a loan or a hire purchase agreement at any time?

Beyond the initial cancelling period of a loan or a hire purchase agreement, you can only end the contract by paying it off completely, unless your loan or hire purchase agreement says otherwise. Some agreements make you pay the lender’s reasonable administration costs and anything else they will lose because of your early repayment.

Generally, an early repayment would mean you end up paying less altogether in the long run, but this is not always the case, you should always check the terms and conditions before signing any agreement.

I can’t repay my loan, what will happen?

You can get into financial trouble if you borrow a loan but can’t pay it back. Once you make the agreement, it’s really hard to get out of it. Note that if you repay it back late, it’s likely you’ll be charged extra interest.

If you can’t afford to keep paying back a loan, try and negotiate with the company you received a loan from. If you do nothing, they may even eventually place debt collectors on you to get the money back more promptly. Your credit record can also be affected if you’re late on payments; Getting a bad credit record could make it hard for you to borrow money again in the future from money lending companies.

If you have absolutely no money, you may choose to apply for a no asset procedure or bankruptcy, but there are long-term disadvantages on those options.

 

What is a no asset procedure?

If you’re in financial difficulty and you can’t pay your debts anymore, an option may be the “no asset procedure” (NAP). The NAP is like bankruptcy but is specifically for people who have a total debt between $1,000 – $40,000.

You only have one chance to enter into a NAP, you must have no assets of worth except for household and personal assets, tools of trade, motor vehicle worth up to $5,000 and cash up to $1,000 and never have been bankrupt previously.

You will also need to do a financial test to show you have no way to pay any money towards your debt. The NAP lasts for 12 months once it’s been approved and you’ll be unable to have a credit of $1,000 or more at any time unless the creditor is aware that you’re currently in a NAP.

What is a layby?

When you buy on layby, the goods are kept at the shop while you pay for them, usually through regular payments. The shop owns the items until you pay off the full price, or an agreed part of it. No interest is charged, unlike hire purchase agreements where there can often be interest or other charges and fees.

Can I cancel a layby sale?

You can cancel a layby at any time before you receive the goods. You can cancel either in writing or by telling the seller verbally. If you cancel, the seller must immediately repay you all the money you’ve paid under the layby, minus any cancellation charges.

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