Purchases in which the financing is arranged at the seller’s direction are assessed in law separately from an ordinary use of credit. Where the seller directs its customer to a bank with which it has a prior arrangement and the credit is made available solely for that purchase, a relationship of linked credit arises — that is, a three-cornered bond between the seller, the bank and the consumer.
What complicates the picture in practice is this: the credit sum is transferred not to the consumer’s account but directly to the seller; yet where the good is not delivered, or the good delivered turns out to be defective, the instalments continue to run. So that this risk is not left with the consumer, the legislature has afforded a number of specific powers to a person using linked credit.
In this briefing note we examine those powers in practical terms under the headings of the formation of the relationship, withdrawal, early settlement, suspension of payment and damages.
The Concept of Linked Credit and How It Operates
In linked credit the seller arranges for credit to be made available to the consumer by a bank with which it cooperates, in order to make possible a purchase from that seller. There is no question of the consumer spending the credit sum wherever they wish; the financing is confined to the price of a good or service determined at the outset. Nor is payment made to the consumer: the credit sum passes directly into the seller’s account.
In the eyes of the consumer, this manner of operation renders the bank and the seller virtually a single counterparty. The legislature has taken that appearance as its basis and has afforded the consumer the following powers against the possibility that the good is defective, is not delivered at all, or is not delivered duly:
- Suspending payment of the instalments, that is, withholding performance of the credit debt
- Requiring that the loss which has arisen be made good
- Withdrawing from the agreement within the period laid down in the Act
- Settling the debt that has not yet fallen due early and claiming a reduction in interest and costs
The Right of Withdrawal from the Agreement
In consumer credit, withdrawal is not a possibility left to the will of the parties but a right arising directly from statute. Article 24 of the Consumer Protection Act No. 6502 (mevzuat.gov.tr) makes express provision on the point:
Consumer Protection Act No. 6502, Art. 24
“The consumer has the right to withdraw from the consumer credit agreement within fourteen days without giving any reason and without paying any contractual penalty.”
The purpose of the provision is to prevent the consumer from hastily assuming an obligation that would strain their capacity to pay. For that reason no reason need be given for withdrawal, and where it is exercised within the period no contractual penalty arises either. Since linked credits are also of the nature of consumer credit, the fourteen-day period applies identically to these agreements. We address the bank’s other obligations in the relationship separately in our note entitled The Bank’s Liability in Linked Consumer Credit.
The Position of the Credit Agreement Where the Sale Is Withdrawn From
Where the agreement concluded with the seller is withdrawn from, the fate of the financing presents a problem in its own right. On this point the Act has not obliged the consumer to deal with the two agreements separately: provided the intention to withdraw is also communicated to the bank within the period, the credit relationship likewise comes to an end, and neither a withdrawal charge nor a contractual penalty may be demanded from the consumer. The provision appears in the fourth paragraph of Article 30 of the Act:
Consumer Protection Act No. 6502, Art. 30(4)
“Where the consumer withdraws from the agreement relating to the supply of a good or service and the notification to that effect is additionally addressed to the credit provider within the withdrawal period, the linked credit agreement likewise terminates without any obligation to pay damages or a contractual penalty.”
The decisive element in practice is that the notification be addressed additionally to the institution providing the credit; a notification made to the seller alone may not suffice to bring the credit relationship to an end.
Early Settlement of the Credit Debt
The ordinary course of a credit relationship is that the bank makes the sum available and the debtor repays principal, interest and charges on the instalment dates determined. Nevertheless, it is always open to the consumer to settle the debt without waiting for that timetable; the whole of the debt may be paid at once, or some of the instalments not yet fallen due may be settled early. In both cases the making of a reduction in the interest and commission items is not left to the bank’s discretion; it is a statutory requirement.
The first provision on the subject appears in Article 20 of the Act:
Consumer Protection Act No. 6502, Art. 20
“The consumer may pay in advance the total sum owed, and may equally make payment of one or more instalments that have not yet fallen due. In both cases the seller or the supplier is, where it takes interest or commission, obliged to make all necessary reductions in interest and commission according to the sum paid.”
A parallel provision in respect of consumer credit is laid down in Article 27:
Consumer Protection Act No. 6502, Art. 27
“The consumer may make payment of one or more instalments that have not yet fallen due, or may pay the whole of the credit debt early. In such cases the credit provider is obliged to make a reduction in respect of all necessary interest and other cost elements according to the sum paid early.”
The conclusion emerging from reading the two provisions together is clear: not only is it legally impossible for a request for early settlement to be refused, but the reduction is not confined to interest and commission either; other cost elements are deducted in proportion to the sum paid early.
Early Payment in Housing Finance Loans
The possibility of early payment applies to all types of credit. Because of the prevalence attained by credit for the acquisition of housing, the legislature has devoted a separate provision to the subject in Article 37, within the chapter headed “Housing Finance”:
Consumer Protection Act No. 6502, Art. 37
“The consumer may make payment of one or more instalments that have not yet fallen due, and may equally pay the whole of the housing finance debt early. In such cases the housing finance institution is obliged to make a reduction in respect of all necessary interest and other cost elements according to the sum paid early.
Where the interest rate is determined as fixed, the housing finance institution may, provided that this is included in the agreement, claim early payment compensation from the consumer in the event that one or more payments are made before their due date. The early payment compensation may not exceed one per cent of the sum calculated after the necessary interest reduction has been made and paid early by the consumer to the housing finance institution in the case of credits with a remaining term not exceeding thirty-six months, and two per cent in the case of credits with a remaining term exceeding thirty-six months. Where the rates are determined as variable, no early payment compensation may be claimed from the consumer.”
As the provision shows, early payment compensation may be demanded only in fixed-rate credits and provided that the agreement so provides; the upper limit is one or two per cent according to the remaining term. In agreements where the interest is agreed as variable, no such charge may be claimed.
The Right to Withhold Payment of Instalments
In credit agreements the rule is that the debtor adheres to the payment schedule. However, the tripartite structure established in linked credit between the seller, the bank and the consumer, and the fact that the bank is held liable to the consumer jointly and severally with the seller, give rise to an exception to that rule.
Where the good or service obtained by means of linked credit turns out to be defective, is not performed at all or is not performed duly, the consumer may withhold payment of the credit instalments. There is no question of the consumer being compelled to pay for a performance they have not received; for the bank is itself liable for the obligation the seller has failed to fulfil.
The Right to Claim Compensation for Loss
If defective performance, or non-performance or improper performance, has caused a diminution in the consumer’s assets, the making good of that diminution may be demanded. The joint and several liability referred to above also widens the range of those against whom the claim may be brought: the loss arising may be sought not only from the seller but also from the bank that provided the credit. For the bank, that obligation is the direct consequence of the cooperation it has established with the seller.
Conclusion
Because in linked credit the bank and the seller act as a single will towards the consumer, the legislature has held the two liable jointly and severally. The consumer is thereby not obliged to confine their claims to the seller where performance has not taken place at all, has not taken place duly, or is defective.
Independent Legal’s Assessment
The first matter determining the outcome in linked credit disputes is establishing whether the credit genuinely bears the character of linked credit. The seller’s direction, the arrangement between the bank and the seller, and the transfer of the credit sum directly to the seller are the principal indicators of that character. The second decisive matter is timing: a failure to communicate the intention to withdraw within the period and to the correct addressee, or to establish the defect in due form, may result in a consumer who is substantively in the right being treated as in default.
In a specific file we recommend that the following headings be assessed in advance:
- Proving the cooperation between the seller and the credit institution through documents and the flow of payments
- Communicating the notice of withdrawal in writing within the period both to the seller and to the bank
- Recording the fact of the defect or non-delivery by means of a formal notice or a written record
- Independently checking the calculation of the reduction in requests for early settlement
- Verifying from the agreement whether the interest in housing finance was agreed as fixed or variable
- Reviewing the risks to the credit rating and of enforcement proceedings before deciding to stop the instalments
Independent Legal provides advisory services and conducts litigation in disputes arising from linked credit relationships, from applications to the consumer arbitration committee through to proceedings before the consumer court.