Entering into a credit agreement when a consumer is already in default on the initial credit agreement

Besides traditional consumer credit agreements, there are more specific agreements, including credit agreements that provide for payment terms in which the terms and conditions of repayment are covered by an agreement between the lender and a consumer when the latter is already in default on an initial agreement, and:

  • such an agreement would avert legal proceedings for default of payment; and
  • the consumer is thus not subject to provisions less favourable than those in the initial agreement.

Who is concerned

Professional lenders as well as consumers who are taking on or have taken on consumer credit.

Prerequisites

The lender or credit intermediary is subject to an obligation to provide pre-contractual information.

Thus, before entering into a contract, the lender or credit intermediary must provide the consumer with the information necessary to compare the various offers and make an informed decision as to whether to enter into a credit agreement. Such information should relate to the clauses and credit conditions being offered, based on the preferences expressed and the information provided by the consumer.

The information must be provided either on paper or on another durable medium, such as e-mail, using a specific form (the "Standard European Consumer Credit Information Form"), and include, in particular:

  • the type of credit;
  • the total amount of credit;
  • the duration of the credit agreement;
  • the interest rate;
  • if applicable, the length of time for which the lender is bound by the pre-contractual information, etc.

See the full list of information to be provided to the consumer by the lender or credit intermediary.

In the case of communication by telephone, and if the consumer asks for an overdraft facility to be immediately available, the following information must be provided to the consumer:

  • the total amount of credit;
  • the lending rate, as well as all of its components;
  • the effective annual percentage rate, illustrated through representative examples;
  • the terms and conditions for termination of the credit agreement;

At the consumer's request, the consumer must also receive, at no cost, a copy of the draft credit agreement containing the information that must be included in all credit agreements, to the extent that the type of agreement entered into is subject to the obligation to include such information in the credit agreement. If at the time of the request, the lender knows that it does not intend to enter into an agreement with the consumer, it is not required to send the consumer a copy.

It should be noted that these pre-contractual obligations do not apply to suppliers of goods or services who act as credit intermediaries as a secondary line of business.

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.

In addition, the following information must appear on a contract which was entered into by an agreement between the lender and the consumer when the consumer is in default of payment for the initial contract, in particular:

  • 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, etc.

See the full list of information to be provided in the agreement.

If the agreement specifies that the payments made by the consumer do not immediately amortise the total credit amount, but instead are used to replenish the capital at the times and under the terms provided for in the credit contract, or an ancillary contract, the contract should clearly state that the credit agreement does not provide for a guarantee of repayment of the total amount of the credit debited from the consumer's account, unless such a guarantee is given.

If at the consumer's request, the agreement is entered into using a remote means of communication that does not enable such information to be provided, the lender must send the required contractual information immediately after conclusion of the contract.

Post-contractual obligations

Consumers must be informed of any change in the borrowing rate (interest rate) before the change enters into force. Notification must be given in paper form or another durable medium.

The amount to be paid after the new rate has entered into force must be specified. If the number or frequency of the payments has changed, this must be indicated.

If the change in the borrowing rate is caused by a change in the reference rate, and the new rate is made public by appropriate means, and the information concerning the new reference rate is also available on the premises of the lender, the consumer and the lender may agree that the consumer is to receive periodical information on changes in the borrowing rate.

Early repayment

Repayment procedure

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 interest and charges due for the remaining term of the contract.

They must notify the lender, on paper or on any other durable medium, of their intention to repay the credit.

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 total cost of the credit. Where applicable, the lender must also inform the consumer of the amount of the compensation due for early repayment.

Compensation to be paid to the lender

In the case of early repayment, the lender has the right to ask the consumer to pay fair and objectively justified compensation for any costs directly linked to the early repayment of the credit, provided that:

  • the amount of the early repayment exceeds EUR 10,000.00 over a twelve-month period; and
  • the early repayment of the credit occurs at a time when the lending rate is fixed.

No compensation is due if the repayment was made under an insurance contract providing a credit repayment guarantee or in the case of overdraft facilities. The same applies if early repayment falls within a period for 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.

The lender may exceptionally claim higher compensation if they can prove that the loss they suffered from early repayment exceeds the threshold defined by law. If the compensation claimed by the lender exceeds the loss actually suffered, the consumer may claim a corresponding reduction in the compensation.

Any compensation owing to the lender may not exceed the amount of interest the consumer would have paid had they not repaid the credit before the termination of the credit agreement.

Who to contact

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