A short-term loan agreement is a consumer contract, and its standard terms can be tested for fairness under Part 2 of the Consumer Rights Act 2015, in addition to the credit-specific rules. The legislation.gov.uk text marks the provisions read here as applying across the UK. Whether a particular clause is unfair depends on its wording and the circumstances, and only a court can decide. This is general information, not legal or financial advice.
What Part 2 covers
Section 61 says Part 2 applies to a contract between a trader and a consumer, other than an employment or apprenticeship contract, and to a notice to the extent that it relates to rights or obligations between a trader and consumer or purports to exclude or restrict a trader’s liability. A loan agreement between a lender and a consumer borrower is therefore within its reach. Part 2 works alongside, not instead of, the credit-specific protections in the Consumer Credit Act 1974 and the FCA’s rules.
The fairness test
Under section 62, an unfair term of a consumer contract is not binding on the consumer, and the same goes for an unfair consumer notice. A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the consumer’s detriment. Fairness is judged by taking into account the nature of the subject matter of the contract, and by reference to all the circumstances existing when the term was agreed and to all the other terms of the contract or of any contract it depends on.
Section 62(3) adds that the rule does not stop the consumer relying on the term if they choose to.
Terms that are not tested: price and main subject matter
Section 64 says a term may not be assessed for fairness to the extent that it specifies the main subject matter of the contract or concerns whether the price is appropriate compared with what is supplied. That exclusion applies only if the term is both transparent and prominent. A term is transparent if expressed in plain and intelligible language and, where written, legible. It is prominent if brought to the consumer’s attention so that an average consumer, described as reasonably well-informed, observant and circumspect, would be aware of it. The section does not apply to terms listed in Part 1 of Schedule 2.
Regulated limits on the cost of short-term credit are covered in the guide to the FCA price cap.
The grey list in Schedule 2
Section 63 introduces Part 1 of Schedule 2, an indicative and non-exhaustive list of terms that may be regarded as unfair. Entries most relevant to borrowing include:
- a term requiring a consumer who fails to fulfil their obligations to pay a disproportionately high sum in compensation (paragraph 6);
- a term enabling the trader to alter the contract unilaterally without a valid reason specified in the contract (paragraph 11);
- a term giving the trader discretion to set the price after the consumer is bound, where no price or method was agreed (paragraph 14);
- a term requiring a disproportionately high sum from a consumer who decides not to conclude or perform the contract (paragraph 5).
Being on the list does not make a term automatically unfair; the list is only a guide to what may be regarded as unfair.
Financial services exceptions
Part 2 of Schedule 2 contains specific exceptions for financial services. Paragraph 22 says the unilateral-variation entry does not include a term allowing a financial services supplier to change the rate of interest or other charges without notice for a valid reason, if the supplier must tell the consumer at the earliest opportunity and the consumer is free to end the contract immediately. The rules on rate changes for regulated credit are set out in the guide to when a lender raises your interest rate.
Effect on the rest of the agreement and in court
Section 67 says that when a term is not binding on the consumer, the contract continues, so far as practicable, to have effect in every other respect.
Section 71 requires a court considering a term of a consumer contract to consider whether the term is fair even if no party has raised the point, provided the court has sufficient legal and factual material. A different route for the relationship as a whole is described in the guide to unfair relationships, and a complaint may also be made to the Financial Ombudsman Service.
FAQs
Does a term have to be on the grey list to be unfair?
No. Section 63 says the list is indicative and non-exhaustive, and section 62 applies to any term that meets the fairness test.
Can a court declare a loan term unfair by itself?
Section 71 requires the court to consider fairness even if no party raises it, where it has enough legal and factual material.
If one term is unfair, is the whole loan agreement void?
No. Section 67 says the contract continues, so far as practicable, to have effect in every other respect.
Can the fairness test challenge the interest rate?
Section 64 says price appropriateness cannot be assessed for fairness if the term is transparent and prominent.
The bottom line
Part 2 of the Consumer Rights Act 2015 lets an unfair term in a loan agreement be treated as not binding on the borrower, while the rest of the contract continues. The test asks whether a term creates a significant imbalance contrary to good faith, with price and main subject matter excluded only where they are transparent and prominent. Schedule 2’s list flags risky clauses, and courts must consider fairness of their own accord where the material is before them.
Sources
- legislation.gov.uk, “Consumer Rights Act 2015, section 62: Requirement for contract terms and notices to be fair”
- legislation.gov.uk, “Consumer Rights Act 2015, section 64: Exclusion from assessment of fairness”
- legislation.gov.uk, “Consumer Rights Act 2015, section 67: Effect of an unfair term on the rest of a contract”
- legislation.gov.uk, “Consumer Rights Act 2015, section 71: Duty of court to consider fairness of term”
- legislation.gov.uk, “Consumer Rights Act 2015, Schedule 2: Consumer contract terms which may be regarded as unfair”