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Debtor/Creditor

Most consumers need to finance some of their larger purchases such as cars, major appliances, or recreational gear. Consumer credit arrangements provide short-term loans for the purchase of goods and services intended for personal, family, or household use. Most consumer credit agreements set up installment credit, where the consumer makes periodic (usually monthly) payments on the loan and accrued interest. Alternatively, consumers repay the less common non-installment credit in one lump sum. In either case, the law directs debtors' responsibilities and creditors' rights.

Consumers often originate their loans with the merchant selling the desired goods, but their debt is often purchased from the merchant by a bank or other institution for a lump sum, with the bank receiving the right to future payments on the loan. Banks and financing companies may also offer loans directly to consumers for proposed purchases. Credit received from the merchant is "vendor credit," while credit established through a financing company is "lender credit." The distinction is important in states that exempt vendors from interest rate limits; however, lenders still must keep their interest rates below the limits established by law.

All lenders must comply with the Federal Truth-in-Lending Act, a federal law designed to protect debtors. The act requires full disclosure of the terms and conditions of any consumer credit transaction, including the total financing cost, the annual and total interest rate, and the payment schedule. In some instances, the act imposes a "cooling-off" period during which the consumer can cancel a loan contract. For example, when a consumer enters into a home equity loan, he or she must receive notice of the right to cancel, and may activate this right until midnight of the third business day after the loan papers are signed.

Other federal laws allow cancellation of certain contracts within the same three-day period. A consumer may cancel door-to-door sales contracts and contracts for more than $25.00 that are made outside of the seller's usual place of business by midnight of the third business day following the agreement. The seller is required to give the consumer a notice of the right to cancel, as well as a cancellation form.

When a debtor defaults on his or her payment obligation, the lender may pursue collection efforts to recover money owed or may repossess collateral to help satisfy the debt. Collection agents must follow the Fair Debt Collections Practices Act (FDCPA) when pursuing debts based on personal, family, or household purchases. The FDCPA prohibits harassment, threats, or abuse by collection agencies. The agents must be truthful to the debtor about the debt and their attempts to collect it, but must take steps to conceal their purposes from third parties. The debtor may make a written request to the collection agency to stop communications, which the agency must honor. Many state laws extend bans on unfair practices to original creditors as well as agencies, and also provide protection for other types of debts.

Creditors must not discriminate when granting credit. Both the federal and many state governments have passed laws prohibiting discrimination on the basis of the applicant's status. In 1974, Congress passed the Equal Credit Opportunity Act, which bans credit discrimination based on sex, marital status, race, religion, and national origin. Consumers who are denied credit in violation of anti-discrimination laws may sue the lender under either the federal or applicable state laws.

Lawyers with experience in debtor/creditor issues can help both parties find the best ways to achieve their goals within the limits of the law.

Checklist: Advertising Consumer Credit

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Advertising Consumer Credit

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