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New hire purchase leaflet for consumers published by OFT

172/05    13 September 2005

A new advice leaflet for consumers considering entering into hire purchase (HP) agreements has been published by the OFT after three major car finance lenders made improvements to their consumer agreements to provide fairer and more transparent contract terms.

Download Hire purchase - Making the right choice (pdf 58 kb)
 
HP is a form of credit commonly used to pay for high value items such as cars, furniture or computers. The OFT's leaflet is designed to help consumers decide if HP is right for them. It explains how HP works and what consumers' rights are before and after they have signed an HP agreement.

HP allows consumers to obtain goods which they can use straight away but the goods are owned by the lender until the money borrowed has been repaid and the consumer has exercised an option to purchase them.

Consumers pay lenders an initial deposit followed by monthly instalments, repaying a proportion of the money borrowed in stages plus interest. Once all the instalments have been paid consumers have the option of buying the goods outright; consumers who exercise the option to purchase will often be required to pay an extra fee.

The leaflet also covers conditional sale (CS) agreements which are similar to HP but consumers are contracted to purchase the goods and will own them once all the instalments have been paid and the conditions of the agreement have been met. There will be no extra fee to pay at the end.

Goods obtained under HP or CS cannot be modified or resold without the lender's permission until the consumer has completed the purchase of the goods. Consumers are liable for any damage caused during the contract period. Failure to keep up repayments can lead the lender to take the goods back and possibly to require further payments in settlement.

Signing up to HP and CS, like any other forms of credit, should be thought of as a purchasing decision in itself, separate from the decision to buy the goods in question. Consumers need to shop around and explore whether these forms of credit are the best buy for them. They may be able to borrow money on better terms through a personal loan, or to get a better deal from another HP or CS provider. The OFT has devised a checklist for consumers considering taking out credit through HP or CS, encouraging them to ask themselves if they have:

• shopped around for a cheaper credit deal
• decided that HP or CS is the right form of credit for them
• worked out the total amount they will have to repay
• checked they can afford the repayments
• read the small print carefully, seeking advice if necessary
• understood what their rights are.

Before consumers enter into an HP or CS contract, lenders must provide key information about the agreement including what the consumer's obligations are and how much they will pay. They must then provide clear contract terms using plain language including this key information.

The OFT has worked with three car finance lenders, Lloyds, GE Capital and Forthright Finance, under the Unfair Terms in Consumer Contracts Regulations, to improve consumer contracts (see note 2). These contracts are now clearer about the importance of paying on time, and fairer about the circumstances in which the lender can end the agreement and the level of compensation payable if the consumer breaks the agreement. Consumers will therefore no longer be at risk of losing their goods and being potentially liable for substantial additional charges after only one late or missed payment.

Sir John Vickers, OFT Chairman, said:

'Consumers purchasing on credit should think carefully about the total cost of the deal on offer and the terms of the agreement. Our leaflet will help people decide if HP is the right choice for them.'

NOTES

1. The Unfair Terms in Consumer Contracts Regulations (UTCCRs) came into force in 1999 (superseding the UTCCRs 1994) and apply to standard contract terms used with consumers in contracts made after 1 July 1995. The UTCCRs protect consumers against unfair standard terms in contracts they make with suppliers.

The OFT, together with trading standards and certain other bodies, can take legal action to prevent the use of potentially unfair terms. A term is unfair if it causes a significant imbalance in the parties' rights and obligations under the contract, to the detriment of consumers. Standard terms may be drafted to protect commercial needs but must also take account of the interests and rights of consumers by going no further than is necessary to protect those legitimate commercial interests. An unfair term in a contract covered by the UTCCRs is not binding on the consumer. Only a court can decide whether a term is unfair.

2. The OFT's work on car finance contracts addressed concerns regarding clauses which deem certain conduct to be repudiatory in unclear language when the conduct may not be repudiatory in fact. The OFT objected to these clauses because their technical form meant that consumers were unlikely to appreciate their significance, in particular that they were at risk of losing their goods and becoming liable to pay full loss of profit under liquidated damages clauses contained in the agreements, after only one late or missed payment. The OFT also objected to the liquidated damages clauses that set a consumer's financial liability on breach. The OFT argued that to be fair the liquidated damages clauses either needed to strike a balance between the different measures appropriate to repudiatory and non-repudiatory situations, or limit their full loss recovery to only those situations which were in fact repudiatory. Further details of the outcome of our discussions with the three car finance lenders, are available on our consumer regulations website.

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