Jason and Jessie borrowed $64,000 from a finance company to buy two cars. Three months later Jessie became extremely unwell, and her doctors advised she would be unable to work for at least a year.
Jason contacted the finance company to explain that they would not be able to afford to pay the $1,300 monthly loan payment for at least a year. Jason was extremely stressed and asked the finance company for help. The finance company gave Jason three options:
- surrender the cars to the finance company to be sold at auction, crystalise the debt, and pay the residual debt at an affordable amount over time
- ask the car dealership to take the cars back to be sold on the yard and finance Jason into a cheaper car
- reduce payments to $500 a month for three months and then restructure the loan with increased monthly payments to repay the loan within the same term.
Jason decided to ask the car dealership to sell the cars for him and bought a $10,000 runabout car so that he would be able to visit Jessie in hospital.
Unfortunately, it took five months for one car to sell, reducing the debt by $20,000. During this time, Jason was not making any payments.
After further discussion between Jason, the dealership, and the lender it was agreed that Jason would take the unsold car back, the lending would be refinanced with the lender writing off $8,000 in interest and fees that had accrued while they were waiting for the cars to sell, and Jason would repay the residual debt at $500 a month for eight months, after which time the payments would revert to $1,100 per month.
About one month before the payments were due to increase Jason and Jessie’s financial situation had not improved and Jason knew he would not be able to afford the $1,100 payments. Jason decided to sell the other vehicle for $17,000. This left Jason with a residual debt of $27,000. Jason could not afford to pay this and complained to FSCL.
The finance company reviewed the circumstances giving rise to Jason’s complaint and said that they believed they had acted appropriately and given Jason as much help as they were able. The finance company gave Jason four options to clear the debt:
- keep the loan account open but restructure the $27,000 to be repaid within the same timeframe, with the runabout car as security
- close the loan account down, crystalise the debt and continue to pay $500 a month, with the runabout as security but with a default listing
- allow a credit from the sale of the car to remain in the account covering the payments for about six months in the hope that Jason’s financial circumstances would improve
- Jason to offer a reduced amount in full and final payment of the debt.
Jason did not accept any of the options saying the finance company had let him down during a very difficult time. Jason had expected the finance company to make the best decision for him, and instead the finance company had restructured the loan so that he would pay more for the lending. It seemed to Jason that the only one profiting from his difficult situation was the finance company.
Jason wanted to know why the finance company had not ‘frozen’ his account for six months to give him time to think about what his best option would be. Jason also suggested that a balloon payment loan structure may have been appropriate, allowing him to make very small payments for a time before making a large lump sum payment at the end of the loan term.
We reviewed the history of Jason’s lending and it seemed to us that the finance company had responded appropriately and reasonably to Jason’s hardship application. By allowing Jason to sell the vehicles through the dealership, rather than repossessing and selling the vehicles by auction, the finance company had shown it was willing to work through the hardship period on Jason’s terms.
We also noted that while the vehicles were for sale at the dealership, Jason did not make any loan repayments. After Jason took the unsold car back the finance company restructured Jason’s loan, writing off $8,000 in interest and fees, allowing payments of $500 a month for eight months before the loan would revert to loan payments of $1,100.
Jason did not accept our view saying that the finance company should do more to help. We reviewed the complaint again but did not change our decision. We recommended that Jason discontinue his complaint.
Insights for consumers
If your circumstances have changed, meaning that you can no longer afford your loan repayments, you should immediately contact your lender. Most lenders will do what they can to help you through a difficult time by deferring and/or reducing payments. However, there are usually limits to how long hardship relief will be available. You should also bear in mind that you will be paying the lender more over the life of the loan because interest and fees will continue to be charged.