In 2019 Kate borrowed $36,000 to consolidate debit with one lender and four credit card providers. The debt consolidation reduced Kate’s loan payments by half, from $1,200 to $600 a fortnight. Kate successfully repaid the debt until April 2020 when her employer reduced her hours, and her pay, by 20% as a result of the Covid-19 lockdown. Kate contacted her lender who offered to reduce her loan repayments to $300 a fortnight for one year.
In February 2021 Kate told the lender she was struggling financially and asked if she could continue to repay the debt at $300 a fortnight. The lender reassessed Kate’s financial situation and offered Kate a slightly reduced loan repayment but were not able to continue the $300 fortnightly payments.
Kate’s financial situation did not improve and, in mid-2021, she asked a financial mentor for help. The financial mentor prepared a statement of financial position for Kate to support another hardship application to the lender. The statement showed that, in addition to the lender’s loan with a balance owing of $30,000, Kate had a $15,000 loan from another lender and three credit cards with total debt of $23,500. The financial mentor said the most Kate could pay the lender was $300 a month.
Kate also explained a little more about her circumstances. In 2019 Kate had been in an abusive relationship. Kate’s husband had expected her to borrow money to support their lifestyle which is why, after refinancing the debt in 2019, Kate had borrowed more money. By mid-2021 Kate had left her husband.
Given this history, the lender was sympathetic to Kate’s situation and said they would reconsider a hardship application but needed three months’ worth of bank statements to get a clear picture of her financial situation. It took Kate some time to organise this information.
By March 2022 the lender had enough information to assess the hardship application and offered to:
- reduce the interest rate from 13% to 5% per annum
- reduce the loan repayments from $300 a week to $450 a month
- review Kate’s financial situation in six months.
As a consequence of this refinancing, the lender explained the term of the loan would increase from 56 months to 80 months, but the overall interest payable would reduce from $10,000 to $5,000.
Kate’s financial mentor did not accept the lender’s proposal and complained to FSCL.
Kate’s financial mentor said the lender was being unreasonable and that Kate could not afford to pay the lender $450 a month. Kate’s financial mentor said that her budget showed the most she could pay was $300 a month. The financial mentor was concerned that by reducing the payments, the term of Kate’s loan would be extended, costing her more in the long run.
Kate’s financial mentor was also concerned that the lender may not have met their responsible lending obligations when lending in 2019, noting that the lender’s budget allowed only $200 a week for food for a family of two adults and two children.
The lender sympathised with Kate’s financial situation, especially as an abuse survivor. However, the lender disagreed with the financial mentor’s budget assessment and said there was enough money in Kate’s budget to pay them $450 a month. The lender considered their refinancing proposal was very reasonable. Although the reduced payments would extend the loan term, the reduced interest rate would mean that there would be no extra cost to Kate.
When we reviewed the file, we had some concerns about the original affordability assessment because the lender appeared to have under-estimated the amount in Kate’s budget for food. However, we noted that Kate had met all the loan repayments until Covid-19 intervened and that the debt consolidation had improved her financial situation. It seemed to us there were other factors, like Covid-19 and the abusive relationship, that were the main cause of Kate’s current financial difficulty.
We spoke to Kate’s financial mentor who agreed that Kate would withdraw her complaint about the irresponsible lending if the lender would accept $300 a month until November 2022. The financial mentor explained that she was pursuing irresponsible lending complaints with the more recent lenders and expected Kate would have repaid enough debt to free up some money to increase her payments to $450 a month.
We put the financial mentor’s proposal to the lender who agreed to accept $300 a month until November 2022 when they would reassess Kate’s financial position with a view to increasing her payments to $450 a month. The lender agreed to Kate’s proposal and the complaint was resolved on this basis.
Insights for participants
We acknowledge that hardship applications can be challenging, especially when a lender feels the borrower has brought the situation upon themselves by incurring further debt. However, when assessing a hardship application, a lender should take the borrower as they find them and work with the borrower, and the financial mentor, to find a durable, workable solution. We were pleased to see a lender asking for all the necessary information and carrying out a robust assessment before offering a solution that combined both a reduced interest rate and repayment amount that made repaying the loan affordable for Kate.