Last Updated: February 6, 2009
In the midst of today’s credit crisis, obtaining credit may be more difficult than just a short while ago. Regardless of whether credit is easy or hard to come by, it is important that consumers understand some credit basics and avoid any unpleasant surprises.
Credit contracts allow consumers to delay payment, usually by allowing the debt to be paid off over time. In exchange, the consumer must usually pay interest on the debt along with other fees and commissions.
There are two basic types of consumer credit contracts. The first is a conditional sales contract where the consumer takes possession of goods before they are fully paid for. Although the consumer has the goods in their possession, the lender continues to hold the legal title to the goods until payment is made in full. This is often the case when a store allows a consumer to take a product home when a store credit card is used for the purchase or when the consumer agrees to make installment payments or enters into a “rent-to-own” agreement. As the consumer does not actually get title to the property until all the terms of the contract are met, it is very important for consumers to find out what can happen if proper payments are not made.
Lenders must provide borrowers with clear credit statements. When using a credit card, consumers must understand that a minimum payment is usually required following each statement. This payment may be a percentage of the balance owing or a flat, fixed fee. Although some lenders offer “interest-free” periods, it is important to read and understand the fine print – the offer might not apply to all purchases or have other “catches”. For example, the interest charged after the “free” period may be excessive.
Another type of consumer credit contract is a promissory note where the consumer promises to pay the money owed sometime in the future or by installments. Promissory notes are frequently used for cash loans. It may also be necessary for the consumer to provide the lender with some security or collateral for the loan. Again, consumers should ask questions to determine what can happen if repayment terms are not met.
While buying on credit may appeal to some people, it can be very expensive. In fact, lenders can legally set interest rates as high as 60% per year! However, in Saskatchewan The Cost of Credit Disclosure Act requires that the cost of borrowing be disclosed before making credit available. Lenders are required to make the total cost clear to the consumer. Interest rates must be stated as an annual percentage rate and the total cost of borrowing, including interest and fees or charges for borrowing, must be stated as one sum. This law applies to both cash loans and purchases on credit.
Many lenders will offer life insurance for their credit contracts, for an additional fee. This means that if the borrower dies, the money owing under the contract will be paid from insurance proceeds, rather than the deceased’s estate. While there is no law that requires consumers to purchase life insurance for credit contracts, lenders can insist that borrowers carry such insurance as a condition of extending credit to the borrower.
It is always a good idea to discuss your credit needs with a trusted financial advisor. Be prepared to disclose a lot of information about your financial situation and credit history. Together, this information can help ensure that both you and your lender fully understand your goals and financial situation before choosing an appropriate credit option.ISBN/ISSN number: 1918-1728