Credit Terminology

Credit Agreements are complicated legal documents. This leaflet explains some of the more common terms you may see on your consumer credit agreement.

REMEMBER

Credit Agreements will contain a lot of 'small print'. The small print will contain your rights and obligations under the contract. ALWAYS read the small print and ask questions if you do not understand any of the terms. Once you sign the contract you may find it difficult to back out.

Creditor and Debtor

The creditor is the person providing the credit e.g. a bank or finance house. The debtor is the customer who takes the credit.

Restricted Use Credit

The credit can only be used for a specific purpose such as a car loan. The credit may be made payable to the supplier of the goods or sent directly to the supplier to ensure the credit is spent in accordance with the agreement.

Unrestricted Use Credit

The credit can be used for any purpose. The debtor will normally receive a cheque or have their bank balance credited with the amount of the loan.

Unsecured Credit

The debtor is not required to provide physical security for the loan e.g. their house. If the debtor defaults the creditor can only sue for the outstanding money.

Secured Credit

The debtor must provide security to the creditor. The most common security is a house. Other examples are cars and jewellery. If the debtor fails to pay then the creditor can repossess the goods provided as security to the value of the outstanding debt. The most common secured loan is a mortgage, however other loans require security so make sure you know what you are signing.

Interest and APR

This is the 'cost' of credit. Interest is usually indicated as a percentage e.g. 10%. APR is the Annual Percentage Rate. This is the interest charge per year for taking the loan. The APR is the best way of comparing different loans. The APR must be indicated by law and should be the most prominent of all interest rates quoted in an advertisement or leaflet. You may see other rates of interest such as 'flat rates' but always look for the APR. An example would be 'Loans- interest 10%, APR 20.2%'.

Default

This is the term used when a debtor does not make the required payments or breaks another part of the contract. If a debtor is in default then the creditor is entitled to take certain action. If you find yourself in default you should receive a 'default notice' from the creditor. Contact your local Citizen's Advice Bureau or Trading Standards Department for advice if you do not know what to do.

Credit Sale Agreement

This is the most common type of credit agreement when buying goods. The customer obtains the goods and legal ownership. Unless secured on land or with other security the creditor can only sue for the outstanding amount in the event of default.

Hire Agreement

This agreement involves the hire of goods. The customer never owns the goods. The creditor can repossess the goods and sue for outstanding debts if the debtor does not pay.

Hire-Purchase Agreement

An agreement often associated with cars. With this type of agreement the customer makes regular payments but does not obtain legal ownership until the end of the agreement when they exercise their 'option to purchase'. The customer cannot usually exercise this option to purchase until all the payments have been made. The creditor has a right to repossess the goods on default until one-third of the payments have been made. After this time the creditor must obtain a court order to re-possess the goods.

Conditional Sale Agreement

The customer does not obtain legal title to the goods until a specific time or event has occurred. It may be a specific number of payments or specific requirements of the agreement (e.g. repairs to a car). The condition will be spelt out in the agreement. Once the condition has been met, the consumer obtains legal ownership of the goods.

Credit Token Agreements

Credit Token is the official name for a Credit Card. The agreement will specify interest rates, credit limits and repayment conditions. The card company retains legal ownership of the card.

Last reviewed/updated: July 2003