These costs may include interest and charges for optional services such as insurance. They may also include fees.
What types of fees can a lender charge?
There are a number of different types of fees a lender might charge a borrower. They include:
credit fees – fees such as establishment or prepayment fees
default fees – fees a borrower must pay if they breach their contract
third party fees – fees another party, such as a broker, charges in relation to a contract.
What rules apply to fees?
By law lenders must make sure that:
they disclose all fees the borrower must pay
they clearly describe those fees
credit and default fees are reasonable
they pass on any third party fees at cost.
Fees must be disclosed
A lender must set out any fees a borrower must pay in the initial disclosure statement. This includes what the fee is, when the borrower must pay it and the amount of the fee. If the lender cannot work out the amount of the fee at that time, then they must set out how they will calculate the fee.
If the contract allows a lender to change the fees they charge, or introduce new fees, the lender must disclose these changes to the borrower within 5 working days of charging the new fee.
Fees must be clearly described
Lenders need to take care when naming and describing fees. This means making it clear to borrowers what a fee is for, the types of costs recovered in the fee, when the lender will charge the fee and what may trigger the fee.
Generally, the name or description of the fee should give the borrower this information.
If lenders describe their fees in a way that is misleading, they may breach both the Credit Contracts and Consumer Finance Act and the Fair Trading Act.
Credit and default fees must be reasonable
Any credit or default fee a lender charges you must be reasonable. A court will consider any costs or losses to the lender and whether the fee reflects a reasonable standard of commercial practice.
If a third party charges a fee in relation to a contract, the lender must pass this on to you at cost. Lenders must also pass on any discounts or allowances.
If a lender expects to be charged a certain amount by a third party and charges the borrower that amount, but the actual charge turns out to be less than estimated, the lender must refund the borrower the difference.
Reasonable commission paid to a lender in connection with credit-related insurance is not a third party fee.