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Credit agreements:
What are they?

Credit agreements: What are they?

Credit agreements: What are they?

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If you decide to borrow money from an authorised lender, you will need to sign a formal credit agreement. Understanding exactly what a credit agreement is, what it covers and what your rights are, is essential so that you know what you are signing and what your credit obligations are.

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What is a credit agreement?

A credit agreement is a formal document that gives you the key information about the financial product that you are considering and the terms of the contract. It should also include details of your rights. Quite simply, it sets out what you and the lender are agreeing to.

Loans, credit cards, mobile phone contracts and hire purchase agreements are just some of the products that credit agreements can cover.

If you are taking out a loan, the credit agreement should detail the terms of the loan, including the amount borrowed, the duration and the rate of interest you will pay. It will set out your repayment obligations and the legal rights for both you and the lender.

Types of credit agreements

The majority of credit agreements are covered by the Consumer Credit Act. This means that if you sign an agreement which falls into this category, you will have rights under the Consumer Credit Act. These are known as regulated agreements.

Some credit agreements are not covered by the Consumer Credit Act, including mortgages, gas and electricity agreements and borrowing from a credit union.

What should I know before entering any credit agreements?

You should be aware of:

  • 1

    The main features of the financial product you are signing up to, including the annual percentage rate (APR)

  • 2

    Repayment amounts and how much you are borrowing in total

  • 3

    Any fees that will be applied if you miss repayments

  • 4

    Any other fees that you may have to pay

  • 5

    Your right to withdraw from the credit agreement

  • 6

    Whether you can pay off your loan early

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Take your time to read through your consumer credit agreement carefully. Make sure you fully understand what you are signing up for and what your rights are. Check if your agreement is covered by the Consumer Credit Act. If it is and your lender has not provided you with all of the information that they are required to, they may have to get a court’s permission before they can pursue you to get their money back, if you do not make your repayments.

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Do not be afraid to ask the lender if you are unsure about anything.

What lender responsibilities before and during the agreement?

Your loan provider should provide you with pre-contract information so that you can clearly see what you are entering into before you sign your credit agreement. Here, you should easily be able to view repayment information and how much interest you will be paying on your loan.

Lenders also have obligations during the agreement. For example, if you fall into arrears (you do not make your repayments and fall behind), the loan provider cannot take action to recover the money until they have sent you a default notice together with a Financial Conduct Authority (FCA) information sheet.

What’s more, when you first fall into arrears, you should be sent an arrears notice and an FCA information sheet.

If a lender does not send the right notice out, then they cannot take you to court until they have provided you with the relevant notice.

What should I know before entering any credit agreements?

After you have signed a consumer credit agreement, you have 14 days to cancel it. It is not necessary to provide a reason as to why you want to cancel in this instance.

However, you must ‘give notice’ that you want to cancel the contract. Ideally, this means writing to the lender and informing them that you want to cancel. If possible, send your letter by recorded post so that you know it has arrived.

There are some credit agreements that cannot be cancelled, such as mortgages and overdrafts.

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Early repayment

It may be possible to pay off your debt early if it is covered by the Consumer Credit Act.

Again, you will need to inform the lender of your intentions in writing. When you do this, ask for an ‘early settlement amount’.

This is the amount of money that you will be required to pay, in order to fully pay off your loan.

You should receive a rebate of a portion of the charges and interest that you have already paid.

It may also be possible to pay off just some of your loan early, known as a partial early settlement.

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What if I can't keep up with payments?

If you are struggling to pay off your debt, it is important to act as quickly as possible.

It is important to note here that if you miss any repayments, this could affect your credit score. This is why it is essential to be sure that you are able to afford to pay back what you are going to borrow.

The FCA information sheet which lenders are required to send you in certain circumstances, offers some helpful tips on what to do next.

Summary

When you borrow money, your loan provider will send you a loan agreement. Always read consumer credit contracts carefully, as they include details about your loan, as well as your rights.

If you sign a credit agreement and then change your mind, you do have 14 days to cancel it, without providing the lender with a reason.

Making sure that you can comfortably afford to repay what you are borrowing, can help you to avoid struggling to meet the repayments in the future. A credit agreement should provide you with all of the information you need to know so that you can make an informed decision before committing to a loan.

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