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Change in circumstances masks original loan unaffordability

Arjun is a solo dad of three primary school age children living in the South Island. Arjun needed a car and saw one advertised in Auckland. Arjun called the car dealer and discussed buying the car. The car dealer offered to fly Arjun to Auckland to collect the car.

When Arjun arrived at the car yard in Auckland, the dealer submitted a loan application for him. The lender calculated that Arjun had a weekly surplus of $280 and would be able to afford the weekly loan payments of $140. Arjun accepted a loan of $17,000 to buy the car and drove it back home.

Arjun missed the first loan repayment and was regularly defaulting on loan repayments within two months of drawing down the loan. When Arjun moved from transitional housing to a more expensive permanent rental, he was struggling financially, and asked a financial mentor for help.

The financial mentor immediately identified the defaults soon after drawdown as a ‘red flag’ and asked the lender for more information about how they calculated loan affordability. When the lender did not give the financial mentor the affordability assessment, she complained to FSCL on Arjun’s behalf.


The financial mentor was very concerned about the car dealer’s actions, saying Arjun understood the loan would be approved before he had even submitted an application. Further, flying Arjun to Auckland to buy the car meant that Arjun had no option but to accept the car and loan offered because he could not afford to buy a return ticket home. Although the financial mentor had not seen the affordability assessment when she referred the complaint to FSCL, on the information available to her, Arjun’s budget was in deficit at the time he applied for the loan.

The lender said it was not responsible for the car dealer’s actions and assessed the loan application on its merits. The lender was satisfied that the loan was affordable and that it was Arjun’s change in accommodation that was causing his financial difficulty.


When we looked at the lender’s affordability assessment, we were concerned to see the lender had:

  • included a WINZ disability allowance for one of Arjun’s children in Arjun’s income without allowing for the corresponding costs the disability allowance was designed to cover
  • under-estimated Arjun’s food costs, allowing for only one adult and one child when Arjun had said he was responsible for three children on the loan application
  • not allowed for non-food items
  • not allowed for transport related costs, which Arjun would now incur.

Taking all these factors into consideration it appeared to us that the lender had not met its responsible lending obligations because Arjun could not afford to repay the loan without suffering substantial financial hardship.

We put this information to the lender and asked if it would be prepared to reconsider its earlier position that Arjun’s financial difficulty was caused by his increased accommodation costs.

The lender reconsidered and agreed to our suggestion that it refund the interest and fees charged on the loan, reducing Arjun’s loan balance by about $6,000.


Arjun accepted the lender’s offer and agreed to repay the residual debt at $50 a week.

Insights for financial mentors

A change in financial circumstances, contributing to financial hardship, can sometimes mask loan unaffordability from the outset. If a borrower defaults on a loan shortly after drawdown this can indicate that a lender may not have met their responsible lending obligations when assessing loan affordability.