A credit agreement is a contract between a lender and a consumer in which the lender agrees to extend credit to the consumer in the form of a deferred payment, a loan or any other similar financial accommodation.
Consumer credit agreements are not to be confused with agreements for the supply of goods or services where the consumer pays in instalments for the duration of the service or supply of goods, e.g. a paid subscription to a newspaper.
Who is concerned
It applies to professional lenders, and in this case to credit intermediaries as well as to the consumer who concludes a consumer credit agreement.
Examples of consumer credit agreements:
- a loan granted for the purchase of goods (car, boat, etc.);
- a loan to finance a service (holiday trip, home renovation).
Certain types of agreements are excluded from the rules which apply to consumer credit agreements, such as:
- credit agreements for the purchase of a building for accommodation purposes, or land for building purposes, and which purchases are secured by mortgage;
- credit agreements granted in the form of an overdraft facility to be reimbursed within a month, etc.
Before concluding the credit agreement, the creditor or credit intermediary must provide the following information to the consumer:
- either in paper format or on another durable medium (email, USB stick, CD, etc.);
- based on a specific form (standard European consumer credit information);
- more particularly:
- the type of credit being offered;
- the total amount of credit and the direct debit conditions;
- the duration of the credit agreement;
- the interest rate;
- the existence or not of a right of withdrawal, etc.
See the full list of information to be provided to the consumer by the lender or credit intermediary before concluding the credit agreement.
When credit is offered at a point of sale, the lender must ensure that the consumer receives, in an appropriate manner, all of the required information at said point of sale, under conditions which guarantee the confidentiality of the exchange of information.
Information other than the mandatory information that the lender may wish to provide the consumer with may be grouped together in a separate document which is to be appended to the "Standard European Consumer Credit Information" form.
For simplification purposes, the following example is limited to agreements concluded by phone:
If, with the consumer's prior consent, the lender calls the consumer to offer a distance contract for financial services, the lender must, at that moment, at least specify the main characteristics of the financial service—total amount of credit and direct debit conditions, duration of the contract, interest rate, amount, number and frequency of payments, description of the good or service, and its cash price if the credit is granted in the form of a deferred payment for a good or service.
The consumer may also ask to be sent a free copy of the draft credit agreement, unless at the time of the request, the lender already knows that they have no intention of concluding a contract with the consumer.
The lender, or, where applicable, the credit intermediary, must also provide the consumer with enough information to enable the latter to compare the different credit agreements available, and to determine whether the credit agreement being offered is suited to their needs and financial situation. They must also inform the consumer of the risks and consequences of defaulting on the repayment of the loan.
Suppliers of goods or services which act as credit intermediaries as an incidental line of business are not bound by the pre-contractual obligations in terms of information.
Before concluding a contract, the lender must check the consumer's creditworthiness. Consumers are required to communicate all necessary information to the lender, such as current financial commitments (loans) and regular income (salaries, pension, etc.).
If the consumer resides in another Member State, the lender can consult, where necessary, the relevant databases in the Member State where the consumer has their usual place of residence.
How to proceed
Conclusion of the contract
The credit agreement is drafted on paper or on any other durable medium and each party receives a signed copy.
Various items of information must be provided in the contract, such as:
- the type of credit;
- the duration of the credit agreement;
- the total amount of credit and the direct debit conditions;
- the interest rate;
- where applicable, the amortisation schedule.
See the full list of information to be provided in the consumer credit agreement.
If the agreement specifies that the payments made by the consumer do not immediately amortise the credit, the contract should clearly state that the credit agreement does not provide for a guarantee of repayment of the total amount of the credit under the credit agreement, unless such a guarantee is given.
Modification of the borrowing rate
Consumers must be informed of any change in the borrowing rate (interest rate) before the change enters into force. Such information may be provided on any durable medium.
The amount to be paid after the new rate has entered into force, as well as the number or frequency of the payments, must be specified.
If the change in the borrowing rate is caused by a change in the reference rate, the consumer and the lender may agree that the consumer is to receive periodical information on changes in the borrowing rate. The reference rate is made publicly available by appropriate means and is also kept available at the lender's offices.
Right of withdrawal
Exercising the right of withdrawal
Consumers have 14 calendar days to withdraw from the credit agreement. They may inform the lender either in writing or orally that they wish to exercise their right of withdrawal. The consumer does not need to provide reasons for their decision to withdraw from the credit agreement.
However, they must comply with any rules governing the right of withdrawal that the lender may have informed them of.
As it is up to the consumer to provide proof of their decision to withdraw, it is recommended that the inform the lender of their decision in writing, preferably by registered mail with acknowledgement of receipt.
The withdrawal period begins:
- either on the day the credit agreement is concluded;
- or on the day on which the consumer receives:
- the general terms and conditions of the credit agreement (contractual clauses and conditions, etc.); or
- the information to be specified in the credit agreement, if that day is later than that on which the credit agreement is concluded.
The withdrawal only takes effect if it is sent to the lender within the 14-day time limit.
Consequences for the credit agreement
Withdrawal from the contract means that the credit agreement is automatically terminated and is deemed to have never existed.
Nevertheless, the consumer must repay the capital already debited from their account, and the interest accrued thereon, no later than 30 calendar days after notifying the lender of their withdrawal. In the event of non-payment within 30 days, the consumer becomes subject to late interest payments at the legal rate. The lender is not entitled to any compensation from the consumer, other than the refund of any non-returnable charges and amounts that the lender may have paid to a public administrative body.
The withdrawal also entails the automatic termination without penalty of all accessory agreements/contracts (e.g. insurance policy).
The consumer may, at any time, repay in advance, either fully or partially, the amount provided for in the credit agreement. In that case, the consumer is entitled to a reduction of the total cost of the credit, which corresponds to the interests and charges due for the remaining term of the contract.
They must inform the lender of their intention to repay the credit in writing or on any other durable medium.
As soon as the lender has received notification of the consumer's intention, they must provide the consumer with the exact amount of the reduction in the cost of the credit. Where applicable, the lender must inform the consumer of the amount of the compensation due for early repayment.
Compensation to be paid to the lender
In the event of early repayment, the consumer may be required to to pay the lender compensation, provided that:
- the amount of the early repayment exceeds EUR 10,000.00 over a one-year period; and
- the repayment occurs at a time when the borrowing rate is fixed.
No compensation is due if the repayment was made as part of an insurance contract intended to provide a credit repayment guarantee, or in the case of overdraft facilities, or if the repayment falls within a period during which the borrowing rate is not fixed.
The amount of the compensation may not exceed:
- 1 % of the repaid amount, if the length of time remaining until the agreed termination of the credit agreement exceeds one year;
- 0.5 % of the repaid amount, if the length of time remaining until the agreed termination of the credit agreement does not exceed one year.
However, the lender may exceptionally claim compensation over and above the above-mentioned ceilings if they can prove that the loss they suffered from early repayment exceeds the ceilings defined by law. If the compensation claimed by the lender exceeds the loss actually suffered, the consumer may claim a corresponding reduction.
However, any compensation to be paid to the lender may not exceed the amount of interest the consumer would have paid had they not repaid the credit before the agreed date of termination of the credit agreement.
Assignment of rights
If the lender assigns their rights under the agreement, or the agreement itself, to a third party, the consumer shall be entitled to enforce against the assignee any means of defence which they could have invoked against the original lender, including a right to compensation where the latter is provided for in the contract and permitted by law.
The consumer must be informed of the assignment, unless the original lender, with the consent of the assignee, continues to manage the credit agreement.
If the agreement between the parties provides for the opening of a current account, the lender must regularly inform the consumer, in a hardcopy document, or on any another durable medium, of any changes in:
- the borrowing rate and the related conditions;
- any reference rate applicable to the borrowing rate;
- existing fees, including any changes related thereto;
- fees to be paid by the consumer;
- the conditions under which these fees may be changed.
Should the cost overruns continue for more than one month, the lender must inform the consumer, in a hardcopy document or on any another durable medium, of:
- the overrun and its amount;
- the borrowing rate;
- any penalties, fees or interest on late payment to be paid.
If the overruns continue for more than 3 months, the lender shall immediately offer the consumer another type of credit agreement.
Termination of open-end credit agreements
The consumer may, at any time and at no cost to themselves, terminate an open-end credit agreement, unless the parties have agreed to a notice period. This period may not exceed 1 month. On the other hand, the lender may not terminate the credit agreement unless the option to do so is provided for in the agreement, and on condition that they give the consumer two months' notice.
If provided for in the credit agreement, the lender may, for objectively justified reasons, terminate the consumer's right to direct debit. In that case, the lender must inform the consumer of such termination, and of the reasons therefor, in a hardcopy document or on any another durable medium, where possible before the termination and no later than immediately thereafter, unless the provision of such information is prohibited by law or is contrary to public order or public security policies (suspicion of money laundering, etc.).
Failure to supply goods or services for which credit agreements are concluded
The consumer is entitled to seek remedies against the lender if the they have sought remedies against the supplier of the goods or services but failed to obtain the satisfaction, if the goods or services:
- are not supplied; or
- are supplied only in part; or
- are not in conformity with the contract for the supply of goods or services.
In the event of doorstep selling, the lender must respect the consumer's choice to refuse doorstep selling (placing of a sticker or distinctive sign) and must comply with the consumer's request to leave the premises and/or not to come back. If the lender fails to comply with these obligations, they run the risk of severe sanctions.