Understanding the fine print
In 2004 Debbie borrowed $9,446.30 from Dosh, Dollars and Dough to buy a car. Debbie was required to repay the loan including interest at $95.69 a week over 3 years, a total of $14,925.93. The loan was secured by the car Debbie had purchased.
Debbie defaulted in her repayments and in 2007 Dosh, Dollars and Dough repossessed the car and sold it at auction for $2,800. The proceeds were credited to Debbie’s loan and her new balance was $10,449.52.
In 2011, Dosh, Dollars and Dough wrote to Debbie and advised that because of her consistent payments they would be willing to refinance her loan balance to $4,160.00 provided she increased her payments to $20 a week.
In June 2011 Debbie signed a new loan contract with Dosh, Dollars and Dough recording the refinance. Debbie was not told that the new loan contract included different provisions, including a clause providing a security interest to Dosh, Dollars and Dough in all of Debbie’s ‘present and after acquired property’ (“PAAP”) and a wider Power of Attorney (“PoA”) in Dosh, Dollars and Dough’s favour.
Debbie stopped making payments towards the loan in 2012 and under the terms of the new contract the loan started to incur default interest at 10% per annum and default fees of $1.00 per day.
Dosh, Dollars and Dough issued an authority to repossess and said they would enter Debbie’s flat to repossess any property that was there. Debbie believed that Dosh, Dollars and Dough would take her items that were of very little value and take her flatmates property as well. In order to prevent repossession Debbie agreed to pay $40.00 a week and was paying this when she made a complaint to FSCL.
The complaint
Debbie was not advised that the new loan was on less favourable terms including a wider PoA, the inclusion of the all PAAP clause and that the loan could incur default interest and fees if she defaulted. Debbie was also concerned about Dosh, Dollars and Dough’s threats to repossess her property of low value.
Dosh, Dollars and Dough’s position
Dosh, Dollars and Dough considered Debbie to have understood the loan as she had signed the contract and initialled each page. Dosh, Dollars and Dough relied on the new contract to charge default fees and interest and believed it had explained that there would be consequences if Debbie did not continue her weekly payments. Dosh, Dollars and Dough said that Debbie had disadvantaged herself by not keeping to the payment schedule; otherwise she would have received the substantial benefit of a reduced loan balance.
FSCL’s involvement
We found:
- The loan contract signed by Debbie in 2004 differed considerably from the 2011 loan contract. As the 2004 contract did not have an all PAAP clause, once Dosh, Dollars and Dough had repossessed and sold Debbie’s car, the loan essentially became an unsecured loan and could not incur further default interest, default fees or costs.
- The 2011 contract did not list specific personal property but, due to the all PAAP clause, Dosh, Dollars and Dough could repossess any consumer goods that Debbie owned.
- While both contracts contained a PoA authorising Dosh, Dollars and Dough to act on Debbie’s behalf, the PoA in the 2011 contract was much wider and authorised Dosh, Dollars and Dough to do more to recover the loan balance.
Our view was that Debbie understood the new contract reduced her balance from $5,809.58 to $4,160 in return for increased payments of $20.00 per week. Debbie did not understand the effects of the new contract’s terms about default interest, default fees, the wider PoA and the addition of the all PAAP clause which meant that if she defaulted she could face repossession of her property and incur default interest and fees.
We found that Dosh, Dollars and Dough had not adequately advised Debbie of this. Dosh, Dollars and Dough should have drawn to Debbie’s attention the most important changes or insisted Debbie take independent legal advice before signing the loan.
As Debbie was denied the opportunity to make a fully informed decision about the new contract before signing, we found that Dosh, Dollars and Dough could not rely on the 2011 contract to repossess Debbie’s possessions or charge default interest and fees.
Outcome
We formally recommended that the 2011 loan contract should remain in place with a balance of $4,160, to be reduced by all the payments Debbie had made since July 2011.
Dosh, Dollars and Dough had to give Debbie an assurance it would treat the loan as unsecured and would not repossess Debbie’s property should she default on the loan in the future. Dosh, Dollars and Dough had to reimburse all interest and costs charged on the loan since the date of the last default on the condition Debbie make a further 10 consecutive payments of $40 a week.
Debbie had to continue to repay the loan at $40 a week and to notify Dosh, Dollars and Dough if her financial circumstances changed. If Debbie defaulted on the loan, Dosh, Dollars and Dough could charge default interest.
Dosh, Dollars and Dough had to pay $250 compensation to Debbie in recognition of the stress and inconvenience caused by the threats of repossession.
Lesson
Creditors should always disclose any material changes and explain to the consumer when entering into a subsequent loan contract and a consumer should read what it is in the new contract. If a consumer doesn’t understand a term they should ask for clarification or seek legal advice.
