Credit contracts: Plain English definitions

Loan documents set out rules you and your lender must follow until money is repaid in full.

What is a credit contract?

A consumer credit contract is a formal written agreement to borrow money, or pay something off over time, for personal use.

Normally, you pay interest and fees for the use of the bank or finance company's money. One or more of your assets might secure the loan.

Examples include:

vehicle finance to buy a car, van, or boat
cash loan, also called a personal loan
mortgage
credit card or store card
agreed overdraft
buying on credit and Buy Now Pay Later accounts.

Rules in your contract must be in line with the Credit Contracts and Consumer Finance Act, which limits things like fees and prevents contract terms from being oppressive law.

The lender is also legally required to disclose certain information to you. See the model disclosure statement below for what information must be included.

Before you agree to a contract

These are not consumer credit contracts.

Laybys.
Unauthorised overdrafts.
Any credit contract for business use.
Loan or credit from a person or business that doesn't usually provide finance.

Different rules and rights apply.

Loans and lenders

Applying for a loan checklist

Applying for a loan checklist [PDF, 422 KB] [PDF, 422 KB]

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

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

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

Check if your contract has all required information

Information you must be given

The most important part of your loan agreement or credit contract is the disclosure statement. This document must set out key information, including:

interest rate, how interest is calculated, default interest rate if you fail to pay
all fees, such as set-up costs, monthly admin fees, repossession costs
total amount to repay
any assets used as loan security, such as your home or car
what happens if you don't pay
how to apply for hardship
how to cancel
contact details for the lender and their independent dispute resolution scheme
any extras you agree to buy, such as payment protection, car breakdown insurance
for vehicle finance, if there's an immobiliser, how it works, and what to do if it's activated and you need the vehicle in an emergency.

The model disclosure statement shows the information that must be disclosed before you enter into the credit contract.

Model disclosure statement [DOCX, 33 KB]

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.

Definitions

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.

Payment problems

If things go wrong with your contract

Right to cancel

You can cancel a consumer credit contract, but you must do this shortly after signing. It's usually within 5 working days — check your contract for time limits.

If you cancel, you must:

cancel in writing, by letter or email
repay any money the lender has given you
pay the cash price for what you bought (for example a car or TV) within 15 working days.

Cancelling means ending the agreement to borrow money or pay over time. You can't return what you bought unless it's faulty.

How to complain

If you think rules in your contract are unfair, or the lender has broken a rule, 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

Example — Paying upfront

Chris buys a $1,000 fridge on credit. The store takes Chris through key points of the credit contract, including the right to cancel. Once the fridge has been delivered, Chris thinks it looks a bit small and asks to return it. But the store says no. With credit sales, only the agreement to pay over time can be cancelled after delivery — the agreement to buy the fridge stays in place. Reluctant to pay the $1,000 price tag in one go, Chris decides not to cancel the credit contract.

Credit contracts: Plain English definitions

On this page

What is a credit contract?

Applying for a loan checklist

Check if your contract has all required information

Information you must be given

What common contract terms mean

Definitions

If things go wrong with your contract

Right to cancel

How to complain

Example — Paying upfront

Related pages you might find useful

​​Credit Contracts and Consumer Finance Act

Understand the true cost​​

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Credit Contracts and Consumer Finance Act

Understand the true cost