In December 2016 James and Juliet borrowed $18,000 from a finance company to buy a car, agreeing to repay the loan in monthly instalments of $290, with two ‘balloon’ payments. One lump sum, or balloon payment, of $3,700 was due in December 2017 and another, of $4,000, in December 2020. Juliet was not working, but expected to return to the workforce shortly and the couple intended saving her income to pay the balloon payments.
James and Juliet paid the $290 payments until September 2017, when James became unwell and was unable to work. Juliet was also not working, because her mother was very ill and Juliet was caring for her fulltime. James and Juliet missed the September and October payments. Although they were able to bring the loan up to date in November, they did not have enough money to pay the balloon payment due in December 2017. James and Juliet were able to borrow money from Juliet’s mother, and paid the balloon payment in February 2018.
At this point, James started worrying about the December 2020 balloon payment. Juliet was still not working and his income was not enough to allow them to save for the balloon payment. James submitted an unforeseen financial hardship application, asking the finance company to restructure the loan to incorporate the balloon payment into the monthly loan repayments.
When the finance company declined James’s application, James complained to FSCL.
Dispute
Although they could afford the monthly payments, James considered he was being a responsible borrower by identifying a problem with the balloon payment early and asking the finance company to restructure his loan to incorporate the balloon payment into the regular monthly payments.
The finance company said it was unable to restructure the loan because James and Juliet would not be able to afford the monthly payments. The finance company said its lending criteria did not allow it to extend the term of the loan to the point where the monthly payments, including the balloon payment, would be affordable.
Review
We reviewed the finance company’s assessment of James and Juliet’s financial situation and could see that if the loan was restructured over the same term James and Juliet’s fortnightly budget would be $190 in deficit. The finance company said that 5 years was the maximum lending term and reducing the payments would extend the loan well beyond 5 years. We explained to James and Juliet that we could not ask a finance company to lend in these circumstances and suggested James:
- explore refinancing with another lender
- continue with the monthly repayments, and if the balloon payment was still unaffordable in December 2020, surrender the car
- surrender the car now.
Resolution
As we were not able to require the finance company to restructure the loan as James had hoped, we suggested he discontinue his complaint. James was very disappointed with the outcome of our investigation because none of the options were viable. James agreed that when they borrowed the money they anticipated that they would be able to save Juliet’s income towards the balloon payment. However, their circumstances had changed and he considered the finance company should have done more to help.
Insights for consumers
Beware of balloon payments. While you may be able to afford the monthly loan repayments, it is important to set aside money to pay the lump sum final amount due when the loan term ends.
