Chapter 13 Credit
Learning objectives
After studying this chapter you should understand the following main points:
■the characteristics of the main types of credit available in the UK;
■the legal framework regulating consumer credit;
■reform of consumer credit legislation by the Consumer Credit Act 2006.380
At some time or another everyone makes use of credit.
It may be a mortgage from a building society to buy your
own home, or hire-purchase arranged by a car dealer to
help you afford the latest model. When the monthly
finances do not work out right, you will probably run up
an overdraft at the bank. Even if it is just paying the
milkman at the end of the week, you have made use of
credit. People in business also rely on credit. A loan may
be needed to translate a good idea into a marketable
product. Established companies often have to look
outside their own resources to finance expansion. Most
businesses give and expect to receive a period of time in
which to pay their trade bills.
Credit consists of either buying something and being
given time to pay for it or borrowing money and paying
it back later. The person giving the credit (the creditor)
is providing service, which the borrower (the debtor) is
usually required to pay for, the price being a certain rate
of interest.
Credit is not a new idea. Moneylenders have been
around for centuries. However, the last 30 years have
witnessed a dramatic increase in the use of credit,
particularly to finance private-home purchase and con-
sumer spending on such items as cars, electrical goods
and furniture. Despite the cautionary proverb, ‘Neither
a borrower nor a lender be’, credit has several clear
advantages. Most people lack the self-discipline to save
up for expensive items. Credit allows them to enjoy the
benefit of goods and services sooner than they otherwise
would. In a period of inflation there is even the prospect
of getting them more cheaply. But the easy availability of
credit can bring dangers to both sides. The problems
facing the consumer are neatly summarised in a com-
ment attributed to a county court judge: ‘being per-
suaded by a man you don’t know to sign an agreement
you haven’t read to buy furniture you don’t need with
money you haven’t got’. Since creditors face the risk that
they may not be repaid, they channel their energies into
finding effective ways of securing their financial interests.
Occasionally this has led to the imposition of unreason-
ably severe terms on borrowers. At first, it was left to the
judges to intervene to redress the balance; thus, from
medieval times equity and the Court of Chancery came
to the aid of mortgagors of land. With the passing of
time, Parliament felt it necessary to impose piecemeal
controls on credit agreements.
In the 1960s, concern about the inadequacies of our
credit laws led the Labour government to set up a Com-
mittee on Consumer Credit under the chairmanship of
Lord Crowther. The Committee reported in 1971 and
some of its recommendations were enacted by the Con-
sumer Credit Act 1974. The provisions of the Act were
brought into force by means of statutory instrument
supplemented by ministerial regulation. The outstand-
ing sections came into force on 19 May 1985 – 11 years
after the Act was passed by Parliament. In December
2003 the Department of Trade and Industry published a
White Paper – Fair, Clear and Competitive, The Con-
sumer Credit Market in the 21st Century– setting out
proposals for reforming the legal framework governing
the consumer credit industry. Proposals in relation to pre-
contractual disclosure, advertising and early settlement