|UFDC Home||myUFDC Home | Help ||
STANDARD VIEW MARC VIEW
This item is only available as the following downloads:
FCS 5002 Consumer Credit Contracts1 Mary N. Harrison2 1. This document is Fact Sheet FCS 5002, a series of the Department of Family, Youth and Community Sciences, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Publication date: July 1999. First published: June 1985. Revised: July 1999. Please visit the EDIS Web site at http://edis ifas.ufl.edu 2. Mary N. Harrison, professor, Consumer Education, Department of Family, Youth and Community Sciences, Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville FL 32611. The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean. Few things are used as much and understood as little by the average consumer as are consumer credit contracts. Efforts have been and are being made to simplify these documents, but more often than not they remain a thicket of terms couched more in lawyer's than in layman's language. However, Truth-In-Lending has brought clearer and more consistent statements about the cost of borrowing money. Consumer credit contracts usually are considered to be retail installment contracts which are designed to buy: Consumer goods such as appliances, furniture and motor vehicles. Services such as repairs on homes and automobiles. Future services such as health spa services, dance club memberships and correspondence courses. For many years it was considered the responsibility of each state government to regulate the extension and cost of credit within its boundaries. Trends are developing toward more uniformity because credit usage has increased, consumers have become more transient, and lenders serve wider areas, often crossing state lines. The federal government's first major input into the area of consumer credit was the enactment of the Consumer Credit Protection Act of 1968 (Truth-in-Lending). Other laws and regulations such as the Fair Credit Reporting Act, The Fair Credit Billing Act, and The Fair and Equal Credit Act have followed. All of these laws relate to the conditions under which consumer credit is extended and to disclosures. They do not regulate the cost of credit. Credit ceilings and usury laws remain the responsibility of each state. Disclosures Truth-in-Lending has two main objectives. One is to ensure that the consumer is told all costs and conditions involved in obtaining and using credit before signing for it. The other objective is to establish a uniform term for the consumer to use when comparing the cost of credit from different sources. The lender must furnish for the borrower a detailed written disclosure before credit is extended. This is usually in the form of a contract which the borrower should read and understand before signing.
Consumer Credit Contracts 2 If the borrower does not understand the terms, he should either carry the contract to someone he trusts to explain it or bring this person with him. Truth-in-Lending requires a complete and accurate listing of: The cash price of the item. Value of any down-payment or trade-in allowance. Number of monthly payments, amount of payment and when due. The true annual interest, based on the unpaid balance called the Annual Percentage Rate (APR). The dollar and cents amount of all credit costs, called the finance charge. The total cost of the item when bought on credit, called the deferred payment price. Any charges for late payments. Florida law requires a retail installment contract to be in writing, to carry the name and address of both lender and borrower, and to be completed before the consumer signs it. The contract must also carry the following statement in bold print: "NOTICE TO THE BUYER: Do not sign this before you read it or if it contains any blank spaces. You are entitled to an extra copy of the paper you sign. You have a right to pay in advance the full amount due and under certain conditions to obtain a partial refund of the time price differential." This notice carries important instructions for the consumer. Unfortunately, however, people often seem to give little thought to it. Credit Ceilings The maximum permissible cost of credit is established by state law. In Florida the amount you can be charged is determined by the type of credit used and the kind of products you are buying. For example, permissible credit ceilings are different for retail installment contracts for household furniture, new cars and old ones. Florida is one of the more progressive states that had enacted good consumer credit laws long before the passage of the Truth-in-Lending legislation. Most of the disclosure requirements of the Consumer Protection Act were already written into Florida laws. When Florida enacted its credit laws, the term annual percentage rate was not in general use. Therefore, the maximum permissible credit ceilings are stated in terms of cents per dollar instead of annual percentage rates. See Table 1 for Retail Installment Contracts. If a consumer has a good "credit rating" or repayment record and shops for the best credit terms, he probably can obtain credit at a cost well below the permissible maximum ceiling. A smart shopper compares the annual percentage rate from several sources of credit before signing any credit contract. Prepayment and Refunds Under Florida law you have a right to prepay your loan, and under certain conditions to obtain a partial refund of the interest or time price differential. This is an area where misunderstandings sometimes occur, because many consumers do not understand the method of figuring the refund. When a loan is prepaid, the creditor uses one of two methods to determine the unused interest charges, the declining balance or the rule of 78. The rule of 78 uses a formula based on the sum of the digits of the months, which allocates more of the interest to the early months of the loan. The declining balance method computes interest on the unpaid principle. If you expect to prepay a loan, ask for the interest to be figured by the declining balance method. Do this when you obtain the loan. When written in your contract, you can be charged an acquisition fee and a fee for handling and processing of your loan if it is prepaid. Right to Cancel The signer binds himself to the terms of a contract with his signature. In most cases when you sign the contract, there is no way of canceling or
Consumer Credit Contracts 3 reversing your obligation. However, there are some exceptions. Legislative hearings on credit usage found that in the areas of home repairs, future services and door-to-door sales, glib-tongued salespeople have frequently deceived their customers. To protect consumers, laws have been enacted that permit anyone signing a contract in these areas to cancel it within three working days. Credit contracts for home repairs, door-to-door purchases and future services (such as health spas, dance classes and correspondence schools) must carry the following statement in bold print: "CONSUMER'S RIGHT OF CANCELLATION. You may cancel this contract without any penalty or obligation within three business days from the above date." Under certain conditions a contract for future services can be cancelled at an even later date. This includes conditions such as the closing of the health spa or the inability of a consumer to take dancing lessons because of an accident. When this occurs the consumer pays only for services received or used. Delinquent Payments The terms of your credit contract determine what happens when or if a payment is late. When the contract says that if a payment is delinquent the "unpaid balance comes due and payable," then you must pay the entire balance due or be repossessed. If the contract so states, you may be charged a late fee for a delinquent payment. Terms to Know Look for language and clauses that could cause you problems, or that you do not understand. "As is" This term means there is no guarantee or recourse on the product. If it is not what you thought you were buying, you still have no choice but to keep it and pay for it. A disclaimer of warranty clause This clause is written in a statement something like this: "This contract expresses all the terms, conditions and provisions of the agreement, and the seller shall not be bound by any verbal modification in respect hereof unless written into this contract before it is signed." The seller is responsible only for what is written in the contract. An even stronger disclaimer states: "Seller makes no warranty of merchantability of the property or its fitness for any purpose and seller makes no warranty which extends beyond the description of the property on the face hereof." This means the items is sold "as is." (If this disclaimer is used in the contract of a product carrying any type written warranty, it can be legally challenged.) Other rules enacted by the Federal Trade Commission, Federal Reserve Board, and Federal Home Loan Board prohibit creditors from including in consumer contracts certain provisions that severely damage those unable to repay their loans. These provisions include: confession of judgement (giving up the right of notification and defense in court); waivers of exemption (loss of state law protections to keep certain personal belongings in case of repossession); wage assignments (agreements to wage reductions to be paid directly to creditor); household goods security (taking by creditor of personal items of much emotional but little economic value). Holder-in-Due-Course-Changes In the past some merchants, to make a sale, have misrepresented the products they sold or made promises they knew they could or would not keep. As soon as the consumer signed the credit contract, it was sold to a financial institution that was not responsible for the promises made by the merchant. The consumer then could get no action from the seller. The buyer had no alternative but to pay for the purchase or ruin his credit record. To help resolve problems caused by holder-in-due-course, a federal regulation now makes the holder of the credit contract responsible for the
Consumer Credit Contracts 4 terms of the sales agreement, if the credit was extended through the merchant. (If the buyer obtained his own credit, this regulation does not apply.) If the terms of the contract are not met or the product is not as stated, the consumer is obligated to try to resolve the problem with the merchant. If the situation can't be resolved, then the buyer has a right to contact the creditor, provide documented proof of his efforts, and refuse to pay for the product. The creditor has three options: To act as a mediator and try to help buyer and seller resolve the problem. To charge the unpaid balance back against seller's account and let the seller try to collect for the unpaid balance. To absorb the loss. The intent of this ruling is for lenders to more carefully evaluate the reliability of merchants from whom they buy contracts. Some lending institutions refuse to extend credit through merchants because of this ruling. An Agreement Contracts are legal documents and you are responsible for what you sign. When you sign the contract you are agreeing to these things: To make payments until your debt is repaid. To not sell or move your purchase from one address to another without the lender's permission until you have paid for it. To not own what you have bought until you have made all payments. To allow the creditor to take back what you have bought if you fail to make payments. Realize the merchant has rights too. He has sold you merchandise for which he paid money. He extends credit to you on the belief that you will do what you promised...pay for the product. If you do not make your payments, he has a right to try to collect from you or take back the purchase and try to recover his investment. If at any time you are unable to make a payment, you should contact the creditor immediately and let him know about your problem. The creditor is interested in getting his money repaid and will usually work with you to find a way for you to meet your obligations. Look Before You Sign Less time is required to study a contract than to try to get out of a poor one. Think about these cautions: Read the contract. Your signature indicates you have read it and agree with its terms. Make sure your contract states clearly everything you have agreed to in your bargaining. Do not sign a contract with blank spaces. They just might be filled in later with false figures. Do not believe the seller who says "this paragraph does not apply to you." Your signature means you have agreed to what is on the paper. Get a copy of the contract you sign at the time you sign it. Look at multiple copies to be sure they are duplicates.
Consumer Credit Contracts 5 Table 1. Retail Installment Contracts Most Household and Personal Goods Florida Retail Installment Sales Act 21.5 percent APR Home Improvements Florida Home Improvement Sales and Finance Act $12 per $100 of original debt. Loan Companies Florida Consumer Finance Act 30 percent of the first $500 24 percent of the next $500 18 percent on amounts over $1,000 up to $25,000 Motor Vehicles Florida Motor Vehicle Sales Finance Act Class 1. New cars of the current or upcoming model year. $8 per $100 of original debt. (About 16 percent APR) Class 2. New cars of last year's model or a used car of up to 2 year old models. $11 per $100 of original debt. (about 22 percent APR) Class 3. Used vehicles of 2 to 4 year old models $15 per $100 of original debt. (about 30 percent APR) Class 4. Used vehicles of over 4 year old models. $17 per $100 of original debt. (about 34 percent APR)