Hire purchase and buying on credit

How it works

A hire purchase (legally called a credit sale) is when you buy something and pay for it later. This means you:

• usually pay in instalments
• can take the item home right away
• might get the finance through the seller or through a separate finance company
• can be charged interest.

There's usually a set-up fee and interest charges, so you might end up paying more than if you buy something outright.

Understand the true cost

Contracts and sales agreements

Hire purchase is different to layby because you take the item right away and might pay interest.

Your rights

A hire purchase is a consumer credit contract. A consumer credit contract is an agreement to borrow money or buy products on credit for your personal use, and the lender charges you interest and fees.

The lender may also take a security interest, which means they can take the product back if you don't make your payments. The lender must be a business that regularly provides credit (for example, a finance company).

Your rights are protected by the Credit Contract and Consumer Finance Act. The lender must check the loan or credit meets your needs, and make sure you can afford repayments without suffering substantial hardship.

For high-cost loans, such as loans with 50% interest per annum or more:

• lenders cannot ask you to pay back more than twice the amount borrowed
• lenders cannot charge compound interest
• lenders cannot charge more than 0.8% of the unpaid loan balance in interest and fees per day when averaged across the loan term
• default fees for missed payments must be $30 or less
• lenders have extra disclosure obligations
• lenders are restricted from making high-cost loans to some repeat borrowers.

For full details on your rights, you can read our credit contract definitions.

Credit contracts: Plain English definitions

Getting approved for credit

Before you borrow or ask your lender for a top up, lenders need to be satisfied that you will make the repayments without suffering substantial hardship. They could ask questions about your income, expenses and current circumstances, including any likely changes to the income you’ll rely on to repay the loan.

Lenders will also need to ask what the loan is for to make sure they provide the right type of finance.

Lenders are legally required to be satisfied that the loan is affordable and suitable, and this may take some time.

Before finalising an agreement to take out a loan or to buy on credit, the lender must take reasonable steps to make sure:

• you can afford repayments without undue difficulty
•  the credit product they provide can meet your needs
• if you require a guarantor, they properly assess a guarantor’s ability to pay without undue difficulty
• that any additional add-on products like credit related insurance are suited to your needs and the costs are acceptable to you if you want them financed as part of the agreement.

What to expect from all lenders providing consumer credit

Lenders need to know the finance product they provide is suited to what you are trying to achieve with the loan, they have however discretion on how they get this information from you.

To do this, they might ask, where relevant:

• how much you need to borrow or the credit limit you require 
• what you need the loan for
• what length of term best suits your needs or, if it’s a revolving credit facility like a credit card, whether you need credit on an ongoing basis 
• where there are any non-avoidable fees or charges for additional goods or services over and above your stated needs, whether you want those and accept their cost
• if the agreement requires lump sum repayments, whether you are happy making lump sum repayments in preference to regular repayments
• if there is a delay in receiving your financed goods of more than 20 working days from the agreement date, when would you like to receive the goods
• if you are refinancing your loan, what you want to achieve by refinancing the loan and whether you accept any known associated costs 
• if you are considering a reverse mortgage, what your future needs and objectives are, including aged care or leaving equity in the property, and how you would like the advances to be paid out.

Using this information, the lender will work out the most suitable products to meet your requirements and discuss the options available if there is a range.

Lenders must work out whether the loan is likely to be affordable.

They could ask about:

• the income you will be relying upon to repay the debt and how sustainable that is
• fixed financial commitments such as accommodation costs, insurance, rates or school fees
• existing debt repayments
• regular living expenses such as utilities, transport, medical costs or child care
• any other regular or recurring outgoings that you are unwilling or unable to stop such as savings, membership fees, tithing or entertainment costs
• what you have planned or anything you can see on the horizon (foreseen circumstances) that might change your future income
• if you already have a loan with that lender, whether you have taken on any other loans (or they may check your credit report).

Lenders must keep records to show that they have substantiated their inquiries.

Lenders may need to verify some of the information you provide

To do this, lenders might ask for supporting documentation such as pay slips, bank statements, contracts or other reliable evidence of your income and expenses.

Lenders may also do a credit check. 

The lender will then use this information to work out whether you can afford the loan repayments. The lender can only lend when your income exceeds your expenses.

If you are financing credit related add-on products like insurance, waivers or warranties

Lenders need to help you understand these products and work out whether they are suitable for your needs and affordable if you decide to include them in the finance arrangement.

To do this, they must ask about:

• what risks or circumstances you are wanting the insurance, waiver or product to cover
• whether you have pre-existing cover, or whether your rights under the Consumer Guarantees Act will protect you against some or all of the risks you need cover for
• whether your employment status, residency or age may make you ineligible to claim on some or all of the benefits you are seeking cover for
• whether you accept the costs of the add-on products

Lastly, lenders have to keep records of their assessments and these are available to you upon request. The records need to show how the lender used the information to arrive at their decision. If you would like to see them, you can make a request and the lender must provide them to you for free within 20 working days.

If you need a guarantor

In some circumstances, lenders may ask for a guarantor. This person will need to pay your loan if you can’t, and lenders must assess their ability to pay without undue difficulty before the guarantee is given. If lenders don’t properly assess the guarantor’s ability to repay the loan, they won’t be able to enforce the guarantee.

What to bring

Come prepared with documents that show:

• your regular income such as payslips
• your current expenses
• other debt repayments
• 3 months-worth of bank statements from your usual transactional account.
• Other relevant documents which may include:
  • your employment contract, especially if you are on part-time or temporary work or 3 month trial period
  • If you are getting income from a boarder, consider how you might show the lender it’s real and how long it might last for.

Be upfront

It’s best to give the lender as much information as possible, especially about circumstances that may impact your income or expenses after you get the loan.

Lenders need reliable information to be able to make good lending decisions.

There are some circumstances when lenders might not have to make extensive inquiries

If you are re-financing or varying your contract and you are not applying for more credit at the same time, then the lender may make less extensive inquiries. One example is a variation for unforeseen hardship.

Another situation is when you are not relying on regular income to repay the debt, and make this known to the lender, for example when you are using the proceeds from the sale of an asset to repay the loan in full.  Also, if your income significantly exceeds your expenses and you are highly unlikely to experience significant financial hardship repaying the loan, a full assessment might not be necessary.

Lenders must still act with care, diligence and skill and this doesn’t mean you won’t be asked any questions. They must still take reasonable steps to work out your financial position.

If you are getting your finance arranged through a broker or a car dealer, they may make the initial inquiries, or may take you through the lenders' inquiries process, depending on what has been arranged with the lender. 

Applying for a loan checklist [PDF, 422 KB]

Applying for a loan checklist — Māori [PDF, 374 KB]

Applying for a loan checklist — Sāmoan [PDF, 367 KB]

Applying for a loan checklist — Tongan [PDF, 369 KB]

Credit checks, scores and history

Insurance

Sometimes insurance or an extended warranty is a condition of buying on credit, so long as these cover reasonable risks and don't double up on insurance you already have.

Examples include:

• payment protection insurance so payments can still be made if something happens. For example, you lose your job
• gap insurance to pay the balance if the product is destroyed and your other insurance does not fully cover what you still owe.

Before you sign anything, the retailer or finance company must make sure the insurance meets your requirements and you will be able to make the insurance payments. They must also give you a copy of each policy before the insurance is arranged.

If things go wrong

Faulty products

Contact the retailer but don’t stop your payments. If you do, you are breaking your contract and may be charged penalty interest. The retailer must address the problem with a repair, replacement or refund. In the meantime you must keep paying.

Faulty products

If you want to cancel the agreement

You can cancel within five working days, but you will have to pay the full price up front.

Credit contracts: Plain English definitions

If you damage, lose or sell the products

If you damage, lose or sell products before you have paid them off, you still have to make your payments.

If you fall behind on payments, the finance company may have the right to repossess the product(s) you bought on credit. They can only take products identified in the agreement, eg the TV bought on hire purchase.

Repossession

If you can't keep up to date with payments

If you struggle to pay on time, it's best your lender knows as soon as possible. A budget adviser or free financial mentor can talk to the lender on your behalf. They can also help create a realistic budget and repayment plan, based on your income and living costs.

Free confidential advice(external link) — MoneyTalks

Find more on dealing with debt:

Payment problems

Making a complaint

If you think your credit company or other financial service provider has acted unfairly in any way, then there are options you can take to address your issue. This can include making a formal complaint with your provider or getting help from a financial dispute resolution scheme. 

Making a complaint about your financial service provider