Credit - A General Guide to the Different Types of Credit
The chances are that when you make a big purchase the trader will offer to arrange a credit deal for you to pay for the item.
This will usually be either HIRE PURCHASE or CREDIT SALE.
Is there a difference? YES and a very important one.
With Hire Purchase you are not the owner of the goods until you have finished paying for them. This means that legally you cannot sell them without the permission of the finance company who are the owners.
It also means that if you get into arrears with your payments the finance company can repossess the goods (although they cannot enter your home without a court order or your permission) if you have paid less than one third of the total credit price. They can also request a court order for repossession up to the payment of two thirds of the total credit price.
If, when the finance company sells the goods to recover their debt, there is a shortfall they can still take action to claim the balance from you.
With Credit Sale the goods are yours from the time the agreement is made and if you fall into arrears with your payments they can’t be repossessed. The credit company can however take action to recover the outstanding debt from you.
Other types of credit around
Loans - similar to credit sale.
Conditional Sale - not widely used now but a mixture of hire purchase and credit sale.
Credit Cards - e.g. Visa, Mastercard allow you a spending limit and you pay a minimum amount each month. You can of course pay more if you want.
Charge Cards - e.g. American Express you must settle your account in full each month.
Store Cards - issued by traders for use use in their shops. You either pay a monthly fixed amount and can spend up to a multiplied sum of that amount or pay a minimum monthly amount depending on what you owe (up to your authorised limit) like a credit card.
Other points worth noting
Settling up early - if you find you have enough money to pay your loan you can ask for a settlement figure. You may be entitled to some rebate and although it may not be as much as you might imagine it will still be cheaper than carrying on with the loan.
Ending an HP Agreement - you must have paid at least half of the total cost and you must give the goods back to the finance company.
If you sign as a Guarantor and something goes wrong you could find yourself paying off the loan. It is a real responsibility so be sure you want to do it before you sign.
If you are refused credit you have a right to check the information held on file about you by the Credit Reference Agencies.
If the goods you buy on credit are faulty don’t stop your payments or you may find yourself in trouble. If the shop can’t sort your problem out you may be able to ask the credit company to help.
Changed your mind?
You can cancel some finance agreements but not others. If you can cancel there should be a box on your form headed "Your right to cancel". Unless you see this box DON’T BELIEVE anyone who says you’ve got time to change your mind.
You cannot change your mind if you sign at the trader’s premises unless the lender hasn’t yet signed the agreement. Act quickly.
If you do cancel the agreement you don’t have to have the goods but obviously if you have them already you must return them.
How do I know which is the cheapest?
Look for the APR (annual percentage rate). This will give you a good indication of the true cost of the credit. The lower the APR the better the deal.
Further help and guidance
This factsheet is intended for general guidance only and should not be taken as being definitive. For specific advice on any of the matters covered by this guidance note, please contact us.
This page was last updated on 3 October 2009
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