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An expensive misunderstanding

For years Astrid worked in a well-paid professional job. In 2016, Astrid borrowed $80,000 from a lender to purchase a luxury car from a dealer for $100,000. The lender and the dealer were in partnership.

The loan was set up with monthly payments of $850, and a final balloon payment of $60,000 at the end of the loan term.

When Astrid bought the car, she thought the loan agreement included the lender’s ‘swap over option’, meaning she could return the car to the dealer instead of making the balloon payment, because the car was guaranteed to be worth at least $60,000 at the end of the loan.

Astrid made the monthly repayments for a few years without any problems. However, just before the end of the loan term in 2020, Astrid was made redundant. Astrid told the lender she wanted to return the car to the dealer instead of making the balloon payment, because she could no longer afford to pay it.

The lender told Astrid her loan agreement did not include the swap over option, and the terms required her to make the balloon payment or sell the car and pay any remaining loan balance. Astrid voluntarily surrendered the car to the lender for sale, who sold it for $35,000.

When the lender pursued Astrid for the remaining balance of $25,000, Astrid complained to FSCL.



Astrid was sure when she purchased the car the lender told her she had the swap over option.

In any case, Astrid said the lender failed to inform her of the risk that the car could depreciate so far below its value, leaving a large sum payable even after the car was sold.

Astrid also didn’t think the lender obtained a reasonable price when selling the car.

The lender said the loan documentation clearly did not include the swap over option, and denied that they would have told Astrid it did, because the car she purchased wasn’t eligible for that type of lending arrangement.

The lender said they adequately explained the risks of the loan agreement to Astrid when she purchased the car, and gave her a copy of the loan agreement, disclosure statement and terms and conditions clearly outlining the terms of the loan.

The lender set a reserve price of $38,000 for the car’s auction, based on an official valuation. The car received no bids at auction, but a buyer approached them afterwards offering $34,000, which the lender countered to $35,000 and accepted because it was a reasonable offer.



We reviewed all documentation and written records relating to Astrid’s loan. The loan documentation clearly didn’t include the swap over option, but there was little written correspondence or other evidence to show what other advice the lender gave Astrid about the loan.

We found that in 2017, Astrid had emailed the dealer asking for confirmation the swap over option applied to her loan, because she couldn’t see it mentioned in her loan agreement, but she was sure she was told it applied.

In the absence of any other evidence, we thought this email showed that the lender had discussed the swap over option with Astrid, but had failed to make it clear it didn’t apply to her loan. As a result, Astrid didn’t understand the risk that she could be responsible for a substantial balloon payment if the car’s value depreciated below $60,000. We said that the lender had breached their responsible lending obligations under the Credit Contracts and Consumer Finance Act to assist Astrid to make an informed decision and be reasonably aware of the full implications of the loan.

We thought the lender had met their obligation to obtain a reasonable sale price for the car. The auction reserve price was based on an official valuation. If the lender hadn’t accepted the buyer’s offer (which wasn’t far below the reserve price, and was countered by the lender), the car could have incurred further storage fees pending sale.



The usual remedy where a lender breaches a responsible lending obligation is to write off the interest payable on a loan so the borrower is only liable for the principal amount they borrowed. The rationale for this is that the borrower has had the benefit of the principal amount during the loan term.

In Astrid’s case, we thought a fairer outcome was for the lender to write off 50% of the interest on the loan, leaving a balance of $17,000 payable. As a borrower, Astrid had an obligation to read and understand her loan documents, and query with the lender why the swap over option wasn’t outlined. Astrid had also clarified with the lender in 2017 that the swap over option didn’t apply to her loan, so she had the opportunity to reduce her risk and prepare for the balloon payment before it fell due in 2020.

Astrid didn’t accept our recommendation because she disagreed that she should bear 50% of responsibility for the situation. Astrid wanted to pursue her complaint elsewhere.


Insights for participants

It is important for lenders to take good records of all interactions with borrowers leading up to a loan being drawn down, even where the loan is clearly affordable at the outset.

Borrowers’ circumstances can change within a short period of time, and good records will show not only that a loan was affordable, but also that the borrower clearly understood the risks before signing up to it.