Consumer credit

If you offer or provide credit to consumers, you must comply with the Consumer Credit Act and all relevant regulations. The terms of the contract must also meet the Unfair Terms in Consumer Contracts Regulations - see customers' rights to challenge unfair contract terms.

If you don't correctly follow consumer credit rules, enforcing a credit agreement against a customer will only be possible using a court order. Certain agreements that were made before 6 April 2007 may not be enforceable at all.

For advice on regulations you must follow when advertising credit arrangements, see rules on advertising credit.

Pre-contractual information and agreement documents

You must ensure the proposed credit agreement is adequately explained to the borrower. This should cover:

• any features of the agreement that may make the credit offered unsuitable for particular types of use
• how much the borrower will have to pay periodically and - where it can be calculated - in total
• any potentially adverse features which may operate in a way the borrower might not expect - eg how repayments are allocated for credit cards
• the cost and other consequences of missing payments
• the borrower's right to withdraw from the agreement, any effects this will have and how to do it

In certain circumstances, this explanation must be provided orally.

Pre-contractual information must be given in good time before the borrower enters into the agreement. This must be easy to understand and contain key financial information, including:

• the amount of credit
• the credit period
• the total amount payable
• examples of the amount payable if the debt is repaid early
• the interest rate
• the annual percentage rate (APR)
• any other fees or charges - eg for missing a payment

Note that the Consumer Credit Directive has changed the rules for calculating the total charge for credit (TCC) which the APR is based on.

You can find advice on how the TCC must be calculated in the Department for Business and Trade guide to consumer credit rules. Download consumer credit regulations guidance (PDF, 563K).

The borrower must be allowed the opportunity to ask questions and have the agreement explained further. They must also be advised to consider the pre-contractual information and be able to take this away to shop around. In most cases it must be provided in a standard format - the Pre-contract Credit Information form - to aid comparability and understanding.

As with the pre-contractual information, there are rules on what must be included in the credit agreement document which the borrower signs. This document must also be clear, concise and easy to understand.

Once signed, you must give a copy of the credit agreement - and any other documents it refers to - to the borrower, unless it's identical to one you have already provided. In which case, you must tell them in writing that the agreement has been executed and that they can ask for another copy of it within 14 days.

Credit checking and declining customers

You must assess a potential borrower's creditworthiness before granting credit or significantly increasing credit already given. This needs to be based on sufficient information - obtained from the borrower where appropriate and from a credit reference agency where necessary.

If you refuse credit based on information from a credit reference agency, you must let the borrower know this and give them the agency's contact details.

Providing information during the agreement

You must give the customer a copy of the signed agreement along with details of their cooling-off rights. And they can ask for a further copy at any time.

All customers must be given regular statements. They can also request additional statements - as often as once a month.

If the customer misses payments or falls behind by more than a certain amount, you must provide notices of sums in arrears. You must also give notice if you intend to impose a default sum - eg if they breach the agreement by missing an instalment - or to charge interest on this.

You must notify the borrower about any changes to the interest rate payable - generally in writing before the change takes place. The borrower must also be informed if the debt is sold or transferred to a third party, unless arrangements for servicing the debt are unchanged.

Any enforcement, default or termination notice you send must be in paper format and must contain prescribed information.

Cooling-off rules

In most cases, the borrower has a right to withdraw from a credit agreement within 14 days of signing, without giving reason. Or within a day of receiving a copy of the executed agreement - or notification of the credit card credit limit - if this happens after the 14-day period.

If a borrower makes use of the cooling-off period they must repay the credit, plus interest for each day the credit was drawn from. Cooling-off rights are not intended to allow customers to return goods or services without sufficient reason.

The right of withdrawal applies to all regulated consumer credit agreements, except:

• agreements for credit exceeding £60,260
• agreements secured against land
• restricted-use credit agreements to finance the purchase of land
• agreements for bridging loans in connection with the purchase of land

Early settlement and termination

The customer can at any time ask for information on the sum payable to settle an agreement early. You must calculate this sum in the way set down in the regulations. The customer also has the right to make a partial early settlement. In certain circumstances, you can claim compensation for early repayments. This applies if it's fair and the amount is no more than 1% of the amount repaid early, or 0.5% if the agreement has a year or less to run.

A borrower can end an open-end agreement at any time - subject to a notice period that must not exceed one month. As the creditor, you must give at least two months' notice to end the agreement, and this must include fair reasons for termination. Certain situations are exempt from this notice period - for example, to help prevent crime.

There are separate rules relating to the termination of a hire-purchase or conditional sale agreement.

Other key points

If the credit is to finance the purchase of goods or services, the consumer has the right of redress from you or the supplier or both in respect of misrepresentation or breach of contract.

You must not harass debtors or use 'undesirable' debt-collection methods, eg sending out documents that look like a court summons or other official documents.

Consumers have the right to complain about lenders and other credit businesses to the Financial Ombudsman Service (FOS).

In certain cases, the consumer may be able to challenge the agreement in court and obtain redress on the grounds that the relationship as a whole is unfair to the borrower.