Consumer and Non-Profit Law
Consumer Credit Definitions
The intent of this pamphlet is to provide information on the different kinds of consumer credit and explain some of the terms you may hear when you apply for credit.
What is Consumer Credit?
A loan, credit card transaction or purchase of goods or services where the price is not paid in full at the time of sale are common forms of credit arrangements. "Buy now - pay later" plans are also a form of consumer credit and are available to a wide range of buyers.
What is Interest?
Interest is the amount it costs you to borrow money or purchase goods or services for which you will pay later. If you buy an item for $100 and you end up repaying $110, the extra $10 is interest. Generally speaking, the lower the interest rate, the lower the interest charges. By law, lenders must tell you what the interest charges will be under the credit arrangement.
Are There Any Other Credit Costs?
It is also a good idea to find out at the start of any credit arrangement if any other fees will be added to the total purchase price. Other credit costs could include registration fees, insurance and legal fees. This information must also be disclosed by lenders. The "true" cost of a purchase will be the price of the item or service plus the amount you repay in interest charges and other credit costs.
What is a Fixed or Variable Interest Rate?
A fixed interest rate means it will remain the same for the full time it takes to repay the loan. A variable interest rate is one that may change over the term of the loan. For example, for the first six months of the loan the interest rate might be 20%, and after a year it might be 23%. Today, both fixed and variable interest rates are common in consumer credit arrangements.
What Are Secured Debts?
Collateral is whatever you give to guarantee a loan. People use items such as cars, stocks, bonds and real estate as collateral. Secured debts are debts guaranteed by collateral. They give creditors added protection to guarantee repayment of a loan. With secured debts, if a debtor misses a payment, the creditor has the right to seize and sell those goods used as collateral for the debt without taking court action.
How Are Debts Secured?
Conditional Sales Contracts and Chattel Mortgages are common methods of securing debts.
A Conditional Sales Contract is set up as a sales contract between a purchaser and a vendor, for example, a car dealership. It is "conditional" because it allows you to have and use the goods on condition that you make regular payment on the purchase price. The creditor remains the owner of the goods until the entire debt is repaid. In conditional sales contracts the store may sell the contract you have signed to a lender such as a finance company. In this situation you would make regular payments to the finance company. If the goods were defective or other problems arose, the store would still have to uphold its end of the contract.
A Chattel Mortgage is a contract signed by the debtor. In the contract the debtor agrees that on failure to pay the amount owing, some of the debtor’s personal property (chattel) will become property of the creditor. Chattels are items such as cars, stocks, bonds and other personal possessions.
What Are Unsecured Debts?
Unlike conditional sales contracts and chattel mortgages, an Unsecured Debt gives the creditor no additional protection to guarantee that the debtor will repay the money. The creditor relies on the debtor’s good faith and promise to pay. An example of an unsecured debt is the use of credit cards.
What Are the Different Types of Consumer Credit?
Three basic types of consumer credit are Credit Sales, Credit Cards, and Cash Loans.
Credit Sales are usually made through a retailer. If you buy an item at a retail store you may have to sign a Conditional Sales Contract and/or a Promissory Note detailing the repayment schedule. A promissory note is a written promise to pay according to the terms of the contract.
Credit Cards are available from a variety of sources. Banks, trust companies and credit unions, financial institutions, finance companies and department stores are just some of the institutions which offer consumer credit.
Cash Loans are usually made through banks, trust companies, credit unions, and finance companies who lend money at a fixed or variable rate. The money is repaid over a set period. Large cash loans usually require collateral. If the consumer gives collateral and defaults on the loan (misses a payment) then the lender has the right to take possession of the collateral given.
Can I Get Different Kinds of Cash Loans?
There are four basic types of cash loans.
Installment Loans: These are loans for which a borrower makes regular payments, usually monthly. For example, you may take out a $3000 loan and agree to make regular monthly payments of $250 until the $3000 and the interest are paid.
Demand Loans: If you are a low-risk customer, that is, if you will have little trouble repaying the loan or if you have the assets to cover the loan, you may get a demand loan. The interest rate with demand loans is usually variable. You repay over time as with installment loans. Loan payments can vary from month to month but you will have to make a minimum payment. With demand loans, the lender may demand repayment at any time.
Lines of Credit: These are set up at banks, trust companies or credit unions for customers with enough income, assets and an active chequing account. There is a limit on the total amount available for you to borrow. To get this credit you pay interest charges on the amount owed and a service fee.
Home Mortgage Loans: These are common types of loans for people buying a home. This is usually a long-term arrangement. For further information on Home Mortgage Loans, see "Buying and Selling a House" published by Public Legal Education and Information Service of New Brunswick.
Where Can I Get More Information on Consumer Credit?
Many financial institutions have materials on consumer credit available to the public. You can check other sources of information such as the Better Business Bureau and your local library. The Federal Department of Consumer and Corporate Affairs and the Provincial Consumer Affairs Branch of the Department of Justice can also give you information about credit. You will find the telephone numbers for these departments in the telephone book.
Public Legal Education and Information Service of New Brunswick (PLEIS-NB) is a non-profit organization. Its goal is to provide New Brunswickers with information on the law.
PLEIS-NB receives funding and in-kind support from the federal Department of Justice, the New Brunswick Law Foundation and the New Brunswick Department of Justice.
We gratefully acknowledge the assistance of Rentalsman and Consumer Affairs Branch, New Brunswick Department of Justice, in the preparation of this pamphlet. The pamphlet does not contain a complete statement of the law in the area of human rights or criminal law. Anyone who requires specific legal advice should contact a lawyer.
Published by:
P.O. Box 6000 Fredericton, N.B.
E3B 5H1 CANADA
Tel: (506) 453-5369
Fax: (506) 462-5193
Email: pleisnb@web.ca
July 2004
ISBN 1-55048-322-6
Disclaimer: Please note that our website contains general information about the law. This is not a complete statement of the law on particular topics. We try to update our publications often, but laws change frequently so it is important for you to check to make sure the information is up to date. The information in our publications is not a substitute for legal advice. To receive legal advice about your specific situation, you need to speak to a lawyer.
