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What is consumer credit and how is it regulated?

Posted 03 December 2015

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If you want to buy something now and pay for it later, you’ll have to borrow using consumer credit. Read on to find out what it is.

It’s almost impossible to be in today’s world and not have come across the term consumer credit before. Consumer credit is the term used when referring to an unsecured debt incurred due to purchasing goods on credit, this can be in the form of a credit card, store card, loans and many more types of borrowing. But how does it affect, or help, your life? Who regulates how consumer credit is used and what are the dangers you should be on the lookout for if you’re thinking of using it? 

The Financial Conduct Authority (FCA)

First, it’s important to remember that any business that wants to offer consumer credit to you must be regulated by the Financial Conduct Authority (FCA). You can check to see who has been authorised to sell you consumer credit on the FCA’s website, they have a searchable list you can check. They also have a list of unauthorised firms to avoid - it goes without saying that you should avoid companies that are not regulated.  

Okay, now that’s out of the way, let’s get on with the main part of this blog…

What is consumer credit? 

It’s a form of lending that’s specifically for consumers – people like you and me, who buy products from retailers and service providers. It can be provided by banks, shops or any financial institution that wants to offer it. It’s usually lent on the basis that you are going to buy goods or pay for services with it, e.g. on a credit card.  So if you decided to buy a washing machine, and wanted to pay back what you owe in small monthly instalments, you’d sign a consumer credit agreement, which is an agreement with you and the finance provider to pay off your purchase. If you buy that same washing machine on your credit card, and, again, pay it back in instalments, over a number of months, that’s also consumer credit. This time you’ve already signed the credit agreement when you took out the credit card. In fact, any money that you borrow for the purposes of buying consumer goods is consumer credit. So it excludes secured borrowing such as a mortgage.

How is consumer credit regulated?   

Consumer credit is regulated by the Consumer Credit Act 1974. It regulates consumer lending including all credit and store cards, personal loans and hire purchase agreements too.  

One of the reasons the act is in place is to protect customers - for example from irresponsible lending from the credit provider. This stops you getting into problem debt very quickly, which could affect you for many years. It also helps to protect you from rogue lenders, who might, for instance, charge you extortionate amounts for borrowing from them – such as loan sharks.       

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The regulations cover all aspects of the credit agreement you’ll be signing, if you decide to use it. It details

• how credit is advertised

• what should and should not be contained in the credit agreement 

• the methods of calculating the APR on the credit borrowed

• how section 75 works – this gives you extra protection when you make purchases using your credit card

• what happens if you default on your payments and what the procedure is if you want to settle what you owe early or terminate your contract

The regulations also advises on what checks need to be done before companies can offer credit to you. They need to make sure of your creditworthiness and carry out an affordability check. This means they should look carefully at your circumstances, and your credit history, and make a realistic judgement on your ability to pay back what you owe in the time that you should. This helps to encourage responsible lending and helps keep people out of problem debt.   

What you should be told 

If your request for borrowing is approved, there are a number of things the lender is obliged to tell you. They must:

• Make sure you understand the nature of the agreement and who the parties – that’s the two or more people involved in the agreement – are.

• They must also give you certain key financial information, such as:

• the annual percentage rate of interest, usually known as the APR

• how long the agreement lasts

• the amount you’ll have to pay in total 

• when the payments are due and how much they’ll be for

• the credit limit you’ve been given 

You should receive this information in a document that’s separate to your credit agreement, it’ll be called ‘Pre-Contract Information’. And both you and the lender must sign the document in order for it to be valid and contractually binding. 

The cooling off period

The cooling off period is the name given to the period of time you have to change your mind about the agreement you’ve just signed. All consumer credit agreements have a built in cooling off period, however, this is different depending on whether you sign the agreement on or off the premises, which means at the lender or retailer’s offices or store. So make sure you know how long you’ve got to change your mind when you sign. An example of off-the-premises is signing up for a new credit card at a temporary stand set up in your local shopping centre. 

The normal cooling off period for most consumer credit is 14 days, which starts from the day you complete the agreement, i.e. the day that it’s signed. During this time you can cancel the contract with no questions asked and no detriment to you. Of course, if you’ve received money or goods during that time, you’d have to return them. And where money is concerned, pay any interest that’s built up on the amount borrowed. But, once that’s done, it’s like the agreement never existed.  

When you’ve signed the agreement off premises, the information that relates to the cooling off period should be sent to you, either by email or post, within seven days of you signing the agreement. You then have five days, not including the day the agreement arrives, to cancel it, again no questions asked. If you do this, you’ll have to return any goods you’ve received and the credit company will return any monies taken to you. Again it would be like the agreement never existed.

When you apply for a credit card the date the cooling off period starts from is a little different. It only begins from the date you receive notification of your credit limit.  

by Shelley Bowers

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