05 Feb 2020

What is a Credit Agreement?

At the start of any transaction involving credit, the lender should provide you with a credit agreement setting out the key terms which will apply to the provision of any type of credit, including repayment terms, how to cancel the agreement and what will happen if either party breaks the agreement.

The purpose of the agreement is to set out very clearly what is expected of the lender and the borrower. During the early stages of credit being used for a transaction, the borrower must be given a copy of the agreement and an opportunity to read all of the terms before entering the agreement.

Some of the most important terms which will be included in the agreement are: the cost of credit, how the annual percentage rate of interest (APR) is calculated, how the agreement can be cancelled, the policy on settling the agreement early, and the consequences of breaking the agreement including default and termination.

Although many credit agreements are covered by the Consumer Credit Act, some are not. Credit agreements relating to mortgages, telecommunications, gas, electricity and water meters, for example, are not covered by the act.

What is a regulated credit agreement?

The majority of consumer credit agreements (eg credit cards, loans) are governed by the Consumer Credit Act 1997. The primary intention of the CCA is to protect consumers and regulate the way in which credit is marketed and sold.

Depending on the type of credit, this act precisely sets out what the agreement document must contain and how it must be set out in great detail. For certain clauses, the act goes as far as providing the exact wording which must be used in the agreement.

Any form of regulated credit agreement must follow the rules of the act. There are many benefits of taking out credit with a regulated credit agreement. These include: a potential statutory interest rebate if you terminate the agreement early, clearly stated guidelines for how settlement figures and interest repayment figures are formulated, the option to terminate your agreement early, and a reliable breakdown of the terms of the agreement which can’t be changed without sufficient notice to the borrower.

It’s also possible for a lender to offer an unregulated credit agreement. An unregulated credit agreement is one that is not covered by the CCA. With this type of agreement, you are not protected by the guarantees put in place by the CCA, making them more restrictive and more likely to change. Unregulated agreements are very rare and only apply to certain products such as credit union loans and peer-to-peer lending.

Can I cancel a credit agreement?

As long as you’re using a regulated credit agreement, you should have no problems with cancelling your plan under certain circumstances. The Consumer Credit Act allows all consumers a 14 day ‘cooling off period’. During this time, you can change your mind and cancel the agreement without any consequences. The credit agreement will set out how to give notice to your creditor, stating your intention to cancel your credit agreement.

There may be consequences if your credit agreement is cancelled after the 14 day period, so it would be best to check your agreement to understand what these may be before contacting your lender.

However, if the agreement is cancelled, any products or money received through your credit agreement (depending on the service you’ve been using) must be returned to your lender. In most cases, you will be given 30 days to do this. Any goods or products which you have as part of the agreement (for example where the loan has been paid in goods and not in cash, e.g. a furniture purchase) will also need to be returned or paid for in full.

After notifying your lender, they will let you know how to cancel your agreement which can differ on a case-by-case basis.

If you are cancelling a loan or other fixed sum agreement (rather than a credit card) it is likely that you will be quoted an early settlement figure. If you are not happy with paying this figure, you can still change your mind and choose to continue your credit agreement as normal. Paying the final settlement figure will typically need to be done within 28 days.

Reading a credit agreement can be daunting if you are not used to it but it is very important that you understand the terms relating to any money you borrow. If you are unsure or inexperienced with using a credit agreement to borrow money, make sure you speak to your lender directly or take independent financial advice from a trained expert.