Hire purchase debt (Scotland)

This fact sheet tells you your rights if you have a hire purchase or conditional sale agreement that is regulated by the Consumer Credit Act 1974.

Use this fact sheet to:

• decide what sort of credit agreement you have;
• understand your rights if you cannot keep up with payments;
• decide if you want to keep your goods or return them to the lender;
• deal with action by your lender; and
• find out how to make a complaint.

The sample letter mentioned in this fact sheet can be filled in on our website.

What is hire purchase or conditional sale?

Hire purchase and conditional sale agreements are usually used to buy cars, although they are sometimes used for furniture and white goods too. They are different from ordinary credit agreements because under hire purchase and conditional sale agreements, you do not own the goods until you have paid off the agreement.

With hire purchase and conditional sale agreements, if you do not keep up with the payments, it is possible for a creditor to repossess the goods. With ordinary credit agreements, the goods you buy belong to you from the time you take out the credit. The lender cannot take the goods back. They can only ask you to pay the money you owe under the agreement.

Check your agreement

Since April 2008, new agreements will normally be covered by the Consumer Credit Act 1974 even if you have borrowed more than £25,000 unless the agreement is for business purposes. An agreement will not be covered by the Act if the borrower is a limited company.

Some hire purchase agreements may give you extra contractual rights, for example, you may be able to return the goods for free after a certain amount of time. Creditors may use other terms to describe these kinds of hire purchase agreement such as ‘Personal Contract Purchase’ (PCP) or ‘rent to own’. Check your agreement to see if you have any additional rights.

If you are not sure what type of agreement you have, check your contract. Contact us for advice if you are still not sure. For more information about PCP agreements, see the later section Personal contract purchase (PCP) agreements.

If you cannot afford to pay but want to keep the goods

If you fall behind with your payments on a hire purchase or conditional sale agreement, the creditor may be able to repossess the goods. Look at your agreement. There will be a box headed Repossession: your rights telling you how much you need to have paid to stop the creditor taking the goods back without a court order (without your consent). This should be one third of the total amount payable under the agreement.

If you have paid a third or more of the total amount payable, the goods become ‘protected goods’ and the creditor must go to court for an order for the goods to be returned unless you consent to the repossession. They cannot just come round and remove them (‘snatch them back’).

In Scotland, the law is unclear about whether a creditor has to get a court order to repossess hire purchase goods if you have paid less than one third of the total amount payable. In England and Wales, it is not always necessary for the creditor to have a court order before repossession. Because Scottish law on this is unclear, you may want to point out to the creditor that they should seek a court order before repossessing goods. If the creditor takes the goods without a court order, the law on this point can only be clarified by going to court.

If a creditor ‘snatches back’ goods without a court order and without your consent where a third or more has been paid, you are entitled to a refund of all the money you have paid under the agreement.

Also, even if you have not paid more than a third of the total amount payable under the agreement, the creditor will need an order from the court, or your consent, to remove the goods from ‘any premises’ they are on.

‘Any premises’ is not defined but includes your garage or drive. If your car is parked on the road (and you have not paid a third) then it is at risk of being ‘snatched back’. The law is not clear about the recovery of a car from a car park.

Working out what you have paid

If you want to work out if you have paid one third or more, remember to include any deposit or part exchange as well as the instalments that you have paid.

Making an offer to pay

You need to work out a budget to see what you can afford to pay. Give us a call and we can send you the right budget to use for you and your business. If you have your figures ready, our advisers can help you complete your budget and send you a summary budget you can share with your creditors if you need to. Don’t offer more than you can afford as you won’t be able to stick to this.

• If you can afford to meet the contractual monthly payments, try to also pay something towards the arrears.
• If you cannot afford to meet the contractual monthly payments, pay as much as you can afford instead.

Always send a copy of your summary budget, so your creditor can see how you have worked out your offer and that you are trying to pay as much as you can. If you need to make reduced payments now but should be able to make bigger payments later, explain this when you make your payment offer.

Think about whether you need to keep the goods. If you can get by without them, it may save money to end the agreement instead. Also think about whether you can make a reasonable offer to pay, either now or in the future. If you can’t, it will usually save you money in the long run if you return the goods earlier rather than later. See the later section Ending the agreement yourself to understand the different ways to end the agreement and how this affects what you owe.

If the creditor has to go to court

Your creditor will have to go to court if you won’t return the goods and you have paid more than one third of the total amount payable. They may need a court order if you have paid less than one third, see the earlier section If you cannot afford to pay but want to keep the goods.

There is still a chance that you can keep hold of the goods, as the court has the power to agree to this as long as you can pay the debt back in reasonable instalments. If you need to keep the goods, it is important to treat this debt as a priority over ordinary credit debts and offer as much as you can afford.

If you have paid less than a third

Where you have not paid a third of the total amount payable under the agreement and if you want to keep the goods, you should ask the creditor to agree to a payment arrangement with you. The creditor is most likely to accept if you can afford the full monthly instalments plus something towards the arrears.

If you can’t make the full payments, the creditor may agree to reduce the payments, but usually by a small amount and only for a short time. In certain circumstances, you may be able to go to court and ask to pay less than the full monthly instalment and extend the length of the agreement. This is called a ‘time order’.

However, if you have a drop in your income that is permanent, you may no longer be able to afford to make more than token payments to the lender. If this is the case, you may have to decide whether you can realistically afford to keep the goods anymore. If you decide that you cannot afford the goods, you need to decide the best way of ending the agreement. See the later section Ending the agreement yourself.

Time orders

If you have received an ‘arrears notice’ or ‘default notice’ from your lender, you can apply to the court for a time order under the Consumer Credit Act 1974. The court may be willing to make a time order for a specific period if you have temporary financial difficulties. They may make a time order even if your financial problems are long term. For more information about this, see our Time orders fact sheet.

If the creditor ends the agreement

If you fall behind on the agreement, the creditor can terminate the agreement in writing. They must send you a ‘default notice’ under the Consumer Credit Act 1974. They will then order you to return the goods. A creditor must send you a default notice before asking a court to order you to return the goods.

The default notice tells you what payments are outstanding and gives you a date by which to make up the arrears. If you cannot pay the arrears within the time specified, the whole balance then automatically becomes payable and the agreement is terminated. However, some agreements require notice to be sent to you by the creditor before the agreement is terminated.

Where a creditor terminates an agreement and repossesses the hire purchase goods, you will usually have to pay the full amount owed on the original hire purchase agreement minus what you have paid and minus the amount the creditor gets back from selling the goods. The ‘option to purchase fee’ is also deducted. The Example agreement section later in the fact sheet might be helpful.

Ending the agreement yourself

If decide to end a hire purchase or conditional sale agreement, there are usually three options:

• terminate the agreement and return the goods voluntarily;
• return the goods voluntarily without terminating the agreement; or
• sell the goods if your creditor has given you written permission to do so.

If you don’t do any of the things and can’t bring your payments back up to date, your creditor will eventually terminate the agreement themselves. They may then tell you to return the goods. If you don’t do this, they may ask a sheriff court to order you to return the goods. The court can let you keep the goods and give you time to pay if they think that would be fair.

If you can’t make a fair offer, it is usually cheaper to terminate the agreement yourself, and may cost you nothing if you are up to date with payments and have already paid at least 50% of the total price. See the following section If you terminate the agreement for more information.

However, it can occasionally be cheaper to return the goods or get permission to sell them yourself. This might be the case if you get into difficulty before you have made many payments and the goods are still worth close to the price you paid for them. See the later section, If you give the goods back without terminating the agreement.

Some agreements also give you additional options, for example, you may be able to return the goods after a certain amount of time. If you are not sure what is best, contact your creditor so they can tell what options you have and the cost of each of them.

If you terminate the agreement

Key facts

You have the right to terminate and end your agreement under Section 99 of the Consumer Credit Act 1974 at any time before your last instalment is due. However, you will have lost the right to terminate your agreement if the creditor has already terminated it, or if the full balance of the agreement has become payable. The one half or 50% figure is stated on the agreement in the box headed 'Termination: your rights'.

It is very important that you tell your creditor in writing that you are terminating and ending your agreement. If you do not terminate in writing, the creditor may not treat it as a voluntary termination and you will not be able to benefit from the 50% limit on what you still owe. Keep a copy of the letter of your termination in case you need proof of this later. There is a Terminate your hire purchase agreement sample letter, which you may want to adapt and send to your creditor when terminating your agreement.

You do not need to have actually paid the 50% to be able to terminate the agreement, although some creditors say you do. All that is necessary is for you to give notice to the creditor in writing that you are terminating the agreement.

Calculating what you owe

The creditor may work out the amount you owe using a different calculation from those shown in the Example agreement at the end of this fact sheet. Contact us for advice if you want to dispute the balance. If you decide to terminate your agreement voluntarily and hand back the goods to the creditor, you should only have to pay up to half of the total amount payable under the agreement, minus sums that you have paid and sums that are due. Sums that you have paid include any deposit plus the instalments that you have paid. Sums due are any arrears or missed payments due at the time of termination.

In addition, you will also owe any damages if you have failed to take reasonable care of the goods (over and above normal wear and tear). The creditor might argue that there will be an extra charge for damage or unusual wear and tear. It is important to look at any charges to see if they are reasonable. See the Example agreement at the end of this fact sheet.

• Where a hire purchase agreement contains a separate subsidiary agreement for insurance products (e.g. for payment protection insurance and/or a guarantee or warranty), it is not necessary to pay off this agreement before terminating the hire purchase agreement.
• Some creditors say they will charge for collecting the goods from you after the agreement has been terminated. They should not charge if this is the only way given to return the goods.
• Your agreement may say that you have to return the goods to your original supplier or somewhere else like an auction house. If that is the case, you should not be asked to return the goods further away than is reasonable on the grounds of cost and distance.
• Terminating and ending your hire purchase agreement does not terminate a subsidiary insurance agreement. You will remain liable for it.

Default notices

You may have a default notice sent to you by the creditor because you are behind with the payments on your agreement. Once the time has run out on the default notice, you may have lost the right to end the agreement voluntarily and to return the goods yourself. It depends upon your agreement. Your creditor may have called in or ‘terminated’ the agreement when the default notice runs out. Some agreements say another notice to terminate the agreement has to be sent to you after the default notice has run out. Contact us for advice for more information.

From October 2008, your lender has to send you a yearly statement about your agreement. They also have to send you an arrears notice, if you miss two payments, along with a ‘debt advice and information package’, telling you where to go for help. If your lender does not follow these rules, they may not be able to take any more action against you or add interest and charges until they do so. If you do not think the creditor has followed these rules correctly contact us for advice.

If you give the goods back without terminating the agreement

It will usually be cheaper to terminate the agreement before giving the goods back, but it can occasionally be cheaper to give the goods back without terminating the agreement first. Giving the goods back without terminating the agreement is usually called voluntary surrender.

Voluntary surrender may work out cheaper if:

• you haven’t had the goods for very long and so haven’t made many payments; and
• the goods still have high resale value.

If you give the goods back, you’ll normally have to pay the full amount owed on the original hire purchase agreement, minus what you have paid and minus the amount the creditor gets back from selling the goods. If you have had the goods for a while so have made some payments and the value of the goods has dropped significantly since they were given to you, it is more likely that it will be cheaper to terminate the agreement yourself. See the earlier section If you terminate the agreement.

If you are considering voluntary surrender, speak to your lender before doing anything to find out if this is likely to be cheaper. A lender will normally sell the goods at auction, so they might sell for a lot less than you expect.

You may be able to get a much better price by selling the goods yourself, but you must have written permission from the lender to do this. If you sell the goods without permission, you may be committing a criminal offence. Your lender can choose not to give permission to sell the goods.

Be aware that you can lose the right to terminate the agreement if you miss payments, so you may have to make a decision on how to return the goods quite quickly.

What happens once the goods have been returned?

No matter how your agreement ended, once the goods have gone back to the creditor they can try to recover any balance still owed by you. You can treat the debt as an ordinary credit debt and make an offer of payment using your budget. If you haven't done a budget yet, give us a call and we can send you the right budget to use for you and your business. If you have your figures ready, our advisers can help you complete your budget and send you a summary budget you can share with your creditors if you need to. If the creditor does not accept your offer they can sue you in the sheriff court for the balance.

If you dispute the balance the creditor says you owe, then it is important to write to the creditor and tell them. This may be because they are claiming you damaged the goods. You may have to put a ‘defence’ in when they send you the court claim, which is sometimes called an ‘initial writ’. The court can set a lower amount than the creditor is claiming if they think the creditor has been adequately compensated for their loss.

Personal contract purchase (PCP) agreements

Some creditors use the term personal contract purchase (PCP) agreement to describe hire purchase agreements for vehicles. PCP agreements often give you additional contractual rights, for example, you may be able to hand the vehicle back rather than make the final payment (sometimes called a balloon payment, because it is usually a lot bigger than your normal monthly payments). Check your agreement to see what it says.

Keeping up with payments and handing the vehicle back in at the end may be cheaper than choosing to end the agreement early yourself. If you choose to end the agreement early yourself, you normally have to pay 50% of the total amount payable. See the earlier section Ending the agreement yourself.

Depending on how big the final payment is, you may find that you will not pay more than a third of the total amount payable before the end of the agreement. This means that if you miss payments, your creditor may be able to repossess the vehicle without getting a court order first. See the earlier section If you have paid less than a third.

Complaints

You can complain to the Financial Ombudsman Service about how a lender or debt collection agency has behaved when dealing with your account. You will have to follow the lender’s complaints procedure first. You can only complain about events that happen from April 2007 onwards. See the next section Useful contacts for details of the Financial Ombudsman Service.

For more information about complaints, see our Complaining about your lender fact sheet.

If you have a hire purchase or conditional sale agreement and you are not sure what to do, contact us for advice. It would be helpful if you have your credit agreement and any default notice with you when you call.

Extra help if you are affected by the cost of living

The Financial Conduct Authority (FCA) have told lenders to give people help if they cannot afford payments for cars or for rent-to-own agreements because of the cost of living. To count as rent to own, an agreement cannot be for a car or business purposes, and payments must be due more than once a month.

If your agreement isn’t for something essential and you’re struggling with other bills and debts, think about whether you would be best off terminating your agreement. See the earlier section If you end the agreement. Some PCP and rent to own agreements may give you extra options which could be cheaper, so check what your agreement allows. If your agreement is ending, you normally need to make a final payment or hand the vehicle or goods back. If this is going to cause any problems for you contact us for advice.

The FCA says that lenders should:

• give you time and opportunity to repay, and not pressurise you into repaying your debt within an unreasonably short period of time;
• put in place an affordable repayment arrangement, and take account of your wider financial situation including other debts and essential living expenses;
• suspend, reduce, waive or cancel any interest, fees or charges if a repayment arrangement is agreed;
• not start or continue repossession action if you are meeting the terms of an agreed repayment arrangement; and
• not start or continue action to repossess a vehicle unless this is a last resort having considered the impact on you and explored all other possible options.

Lenders should also make you aware of your right to voluntarily terminate a hire purchase or conditional sale agreement where appropriate and where it is in your best interests to do that. Lenders should also allow you a reasonable time to seek debt advice where you have said that you intend to do that. They should also be clear about any impact on your credit reference files.

Useful contacts

consumeradvice.scot Phone: 0808 164 6000 www.consumeradvice.scot

Financial Conduct Authority Phone: 0800 111 6768 www.fca.org.uk

Financial Ombudsman Service Phone: 0800 023 4567 or 0300 123 9123 www.financial-ombudsman.org.uk

Finance & Leasing Association Phone: 020 7836 6511 www.fla.org.uk

Example agreement

How the amount you owe can differ

• Total amount payable under the HP agreement = £4,000
• Amount already paid (deposit + instalments) = £1,600
• Arrears ('sums due') = £200
• Damages for failure to take reasonable care of goods = £250
• Value/sale proceeds of goods = £900
• 'Option to purchase' fee = £5

Where you terminate / end the agreement

50% of amount repayable	£2,000
LESS
Sums paid	£1,600
Sums due	£200
=	£200
PLUS
Arrears	£200
Damages	£250
YOU WILL OWE	£650

Creditor ends the agreement

Total amount payable under the HP agreement	£4,000
LESS
Sums already paid	£1,600
Sale proceeds	£900
'Option to purchase' fee	£5
YOU WILL OWE	£1,495

Other fact sheets that may help you

Complaining about your lender fact sheet

Refused offers fact sheet

Time orders fact sheet