Dialogue: Hire purchase could prove costly trap for the unwary

By CATRIONA MacLENNAN*

Would you guarantee a loan for someone you had never met? Of course not. But that is exactly what can happen under our consumer credit laws.

Consider the following case. M bought a car on hire purchase. Wishing to upgrade a year later, she returned to the same car yard and asked to do a trade-in.

She was still paying off the first hire-purchase contract, but the salesperson told her to sign some documents to release herself from liability.

M drove off in her new vehicle, believing that was the end of the matter.

What she did not realise was that the paper she had signed to "release her from liability" was, in fact, an assignment.

The car yard traded the first car on to someone else, who was "assigned" the original hire-purchase contract.

Buried in the small print was a crucial clause.

It stated: "The purchaser hereby acknowledges that nothing herein contained shall release the purchaser from liability under the said agreement and that notwithstanding that future demands may be made upon the assigned the purchaser shall in all respects remain liable under the said agreement."

Despite the fact that M was the one disposing of the first car, she was the "purchaser" referred to in the clause. What it meant was that M was made a guarantor for the second purchaser.

She had never met him and knew nothing about his circumstances.

He later defaulted on payments, and the finance company came chasing M for the money.

The assignment meant that she remained liable in law under the first hire-purchase agreement. Clearly she would never have signed the papers if she had understood that.

So what is an assignment?

Assignments transfer rights or liabilities to third parties. One common use is assignment by finance companies of rights under hire-purchase agreements to a debt-collection company. If a borrower has defaulted and the finance company does not wish to chase up the debt, it will be assigned to a debt collector.

In the consumer arena, assignments typically occur between family members or people known to one another.

Someone who has bought a car on hire-purchase may be struggling with payments and the family will decide that a relation should take over the contract.

All parties know one another and understand what the transaction involves. This is what is envisaged by the law.

The type of assignment M encountered is completely different.

It occurs mainly in Auckland and has become more common in recent times. It is an easy way for a car yard to deal with a transaction because it saves entering into an entirely new credit contract.

The disadvantage is to the consumer, who is unlikely to understand the legal implications of what has happened. As was the case with M, a nasty surprise may lie in store later on.

The Government, in its present review of consumer credit laws, should take steps to ban such assignments.

Few consumers would understand them and the potential for serious hardship is real.

A wide-ranging review of consumer credit law has been under way for several years, with the publication of five discussion documents, public submissions and consultation around the country.

This is not before time because New Zealand's consumer credit laws are outdated, confusing and difficult to access. There have been no major changes to credit laws since 1981, when the Credit Contracts Act came into force.

The Ministry of Consumer Affairs is examining the relevance of existing laws, scope of simplification, ways to strengthen compliance and enforcement, and specific legislative provisions which cause detriment.

The way in which assignments are being used in Auckland clearly carries the potential for detriment to consumers.

The document signed by the "purchaser" in such cases is labelled a "purchasers assignment" to make it look as though the consumer is initiating the transaction.

In fact, the dealer instigates it and the consumer is unlikely to comprehend what is occurring.

Taking steps to limit assignments to the purposes for which they were originally intended would enhance consumer protection.

* Catriona MacLennan is a South Auckland lawyer.