What you need to know about borrowing and your rights when you enter into a credit contract.

Make an informed decision

Your first decision is whether you need to take a loan out at all. You have a consumer credit contract if you:

  • have a mortgage
  • use a credit or store card
  • have a personal or cash loan or an arranged overdraft
  • buy goods or services on credit.

Your lender should help you make an informed decision and make sure you know your obligations as a borrower. The terms of the contract must be expressed clearly, concisely, and in language that you understand. Before they lend to you they must check that:

  • the loan meets your requirements and objectives
  • you can afford to make repayments without suffering substantial hardship.

Read Understanding credit contracts to find out more.

Checklist before you borrow money

  • Read the Code of Responsible Borrowing(external link), developed by the NZ Federation of Family Budgeting Services.
  • Check the total amount you’ll have to pay back: this is much larger over a longer time. Use the Debt calculator(external link) on the Sorted website.
  • Check if your home or household items will be used as security for a loan. If you don’t keep up the repayments, you could lose your home or household items.
  • Shop around for the best deal: lenders’ standard form contract terms and their costs of borrowing must be available to the public for each type of loan they offer.
  • Visit Community finance low-income loans(external link) on the Salvation Army’s website for affordable loans for approved people on low incomes.
  • Check if extra costs have been added: include fees like brokerage fees and set-up fees.
  • Check if you need credit-related insurance or not: don’t get it unless you actually need it.
  • Find out what will happen if you miss a payment: is there a penalty payment if you miss a payment (eg, late payment fees or over-limit fees for credit cards)? What is the effect on your credit rating?
  • Get advice on the paperwork before you sign: don’t be pressured into signing it straight away. Take the contract away and get advice before you sign it.
  • Check if ‘free gifts’ are actually free: make sure that the cost of the ‘free gift’ hasn’t been added into the overall cost of the loan.
  • Check who you’re dealing with: if you’re not using a broker, a broker fee shouldn’t be added to your loan. The lender must be registered on the Financial Service Providers Register(external link). You should also ask the lender what their internal complaints procedure is.

Know your rights

The Credit Contracts and Consumer Finance Act (CCCFA) protects you as a borrower and gives you certain rights to:

  • change your mind for any reason during a five-day cooling-off period and cancel the contract
  • repay what you owe on your contract early
  • ask lenders to change their contract if you are suffering unexpected hardship.

You need to tell the lender in writing that you want to cancel the contract. Hand-deliver your letter or send it by registered mail to make sure it arrives in time.

Cancelling the credit doesn’t always cancel the purchase. If you’ve borrowed money to pay for products and have already taken them home, you’ll need to pay for them within 15 working days. You may also need to pay a small amount to cover the lender’s costs.

The CCCFA also sets out rules called the lender responsibility principles that your lender must follow when lending you money.

See also:

Lenders must also make information about their standard contracts, fees and interest rates publicly available (online) so you can compare mortgage rates more easily.

Credit fees must be reasonable and relate to the actual costs incurred by the lender.

Credit fees

Credit fees are any charges or fees you pay to the lender:

  • as a condition of the contract
  • in connection with the contract
  • for their benefit.

Credit fees aren’t an interest charge or a default payment charge if you miss a payment, or government fees. Credit fees must be reasonable and include:

  • establishment fees: application, commitment, documentation or booking fees relating to the lender’s costs for the credit application
  • prepayment fees or break fees: when you pay off all or a part of the unpaid balance before the contract term ends to compensate the lender for their loss because of early repayment.

For more information read the Commerce Commission’s factsheet on consumer credit contracts(external link).

Interest charges 

Interest charges are what a lender charges you for the use of their money. The charges are determined by applying a rate but only to the unpaid balance. The annual rate of interest must be stated in the consumer credit contract. Interest must not be charged in advance. A lender can charge what interest rates they choose, but the CCCFA sets out ways lenders must calculate interest charges.

Default fees

Default fees apply if you miss payments or break other conditions of your credit contract. They include any fees or charges that a lender incurs to enforce a contract, but not default interest. They must be reasonable, ie only cover the lender’s costs incurred because of the default, or a reasonable estimate of those losses.

Default interest

Default interest is a higher interest rate that you are charged when you have missed a payment and while the non-payment continues. Default interest charges can also apply if you exceed the credit limit. They only apply to the overdue amount, not the entire unpaid balance.

Note: for contracts entered into before 6 June 2015, lenders can charge default interest on the total unpaid balance. The charges must also relate directly to the loss the lender experiences as a result of the non-payment.

Contact the bank or lender first

If you have concerns about your bank’s or lender's decisions or are in financial difficulty, you should contact your bank or lender first. If your concern or difficulty is not resolved to your satisfaction, you can then contact the Financial Dispute Resolution Scheme (external link)that your lender belongs to.

Read Resolve a problem to find out more.

Next steps

If you are unable to resolve your issue directly with the bank, our Resolve It tool has information to help you take the next steps. These may include going to the Disputes Tribunal or District Court.

Resolve it: Banking, finance and insurance

Need more help?

Contact the Ministry of Business, Innovation and Employment's (MBIE) Consumer Protection helpline for more guidance.

If you are in financial difficulty, the Insolvency and Trustee Service(external link) and Federation of Family Budgeting Services(external link) may also be able to help.

Common situations

Credit card payments

Janet applies online for a credit card. She decides to only pay the minimum on her balance owing at the end of the month. She will be charged interest on all outstanding transactions at the end of the month as she is not paying her full balance.

Struggling with payments

Lisa is a single mum with two kids. She has been struggling to pay her bills for a while and her electricity and phone bills are now two weeks in default. Lisa decides to get help and goes to a local budget advisor. They help her negotiate a repayment plan with her electricity and phone providers and work out a plan to manage her other bills.

Hardship application

When Ernest loses his job, he misses a repayment on his mortgage. Ernest goes to see his bank to discuss what he can do about his current situation. The bank helps him to make a ‘hardship’ application and approves a three-month holiday on his mortgage payments to give him time to look for a new job.