What common contract terms mean
Borrowing money and buying on credit involves a lot of paperwork. Before you sign, the lender must:
- help you understand the documents
- help you determine affordability and suitability of the loan
- give you time to get independent advice.
If not, they may be breaking lender responsibility rules — and you might agree to something unfair and/or expensive for you.
These definitions can help you, or anyone supporting you, understand the documents and check your lender's explanations.
C — D
Credit contract means a loan agreement, mortgage document, or other agreement to repay a debt over time.
Credit fee means extra costs set out in your credit contract, eg establishment fee, monthly admin fee.
Examples of common fees
Creditor is the person or business you owe money. With credit contracts, this is usually your lender, eg bank or finance company. If a debt collector buys your unpaid debt from a lender, they become your new creditor.
Disclosure means information sharing, usually between the lender and you. By law, lenders must make initial disclosure of key information before you sign anything. When the loan is finalised, the lender must make continuous disclosure, which means regular updates on your payment progress and loan account. The minimum is every six months, or more regularly for credit cards and other revolving arrangements.
Disclosure statement is the document you sign when starting a loan or other credit contract. By law it must set out key information, including money involved, what you and your lender must do, loan security, and your right to cancel.
Your rights: Information you must be given
Default means falling behind on payments and failing to get back on track, or breaking another rule of a credit contract. Someone who misses payments is sometimes called a defaulter.
Default fees are charged if you fall behind on payments, including fees for repossession notices and repossession warrants.
Default interest is penalty interest charged on overdue payments. It's charged on top of your usual interest, and at a higher rate.
F — P
Full prepayment means paying in full before the final due date. You will likely pay an admin fee — and extra costs if repaying early means the lender loses money through lost interest. This can be a large amount. Lenders can legally charge an early repayment fee (or break fee), but it must be a reasonable estimate of their loss.
Hardship, or unforeseen hardship, is a sudden life event making it difficult to afford regular repayments. Examples include job loss, serious illness or injury, relationship break-up. If this happens, you can make a hardship application to change or postpone repayments. You cannot ask for interest rate changes.
Hardship application means asking your lender for help if a sudden life event affects your finances — see examples above. You can ask for a repayment holiday and/or reduced payments over a longer time period. The lender will likely ask for proof. Time limits apply so act promptly.
Interest is what the lender charges for the use of their money. No interest rate limits currently apply, but the law sets out how interest is calculated.
Payment protection / payment protection insurance / credit insurance all mean you pay extra to cover repayments if you die, become disabled, lose your job, or other life events. Conditions apply, so make sure you understand what is and isn't included. You might already have insurance that could help.
R — S
Repossession is when the lender or a repossession agent enters your home, garage or other location to take items if you fail to pay what you owe. They can only take items listed as security in your credit contract.
Security means assets listed as security in your credit contract — eg home, car, TV, jewellery — that can be repossessed if you stop paying. Household necessities cannot be used as security, eg beds, cooking equipment, washing machines, fridges, passports.
Security interest means the lender's right to repossess and sell your assets if you stop paying. Money from the sale will then be used to cover your debts.
Standard form contract means the same terms and conditions apply to everyone who deals with that lender. These will be on your lender's website, and should also be given to you as part of your credit contract.
Common terms and conditions
What lenders must do
If your problem is not the contract but keeping payments up to date, tell your lender as soon as possible. They may agree to adjust payments.
If things go wrong with your contract
If you think rules in your contract are unfair, or the lender has broken a rule, follow these steps — you might not need to do all three:
- Contact the lender: Talk to the lender or broker as soon as possible. Many issues can be solved at this step.
- Contact the lender's dispute resolution scheme: Get independent help to solve problems if you and the lender can't agree.
- Report the lender to the Commerce Commission: This government agency gathers information to identify lenders who break the rules. It doesn't take on individual cases, but acts against lenders who often break the rules.