In early May 2023, Theo applied to a lender for a $3,800 top up to his existing $12,500 loan. Theo agreed to use his car as security for the top up.
Theo’s existing loan had payment protection insurance (PPI), which he could claim against if he, for example, was made redundant and could no longer make his loan repayments. Believing his top up was an extension of his existing loan, Theo did not tick the box requesting PPI when he applied for his top up. However, instead of extending Theo’s existing loan, the lender had created a new loan agreement consolidating the existing debt with the loan top up. Because Theo hadn’t ticked the PPI box on the new loan agreement, his PPI cover had ended in early May 2023.
By mid-May 2023, Theo had stopped working due to his mental health. He fell into hardship and was unable to afford his loan repayments. Theo made a hardship application to the lender, which was declined. Theo was worried that the lender might try and repossess his car.
Theo complained to FSCL.
Dispute
Theo complained that the lender:
- Did not check that he could afford to borrow the additional $3,800, under the Credit Contracts and Consumer Finance Act 2003 (the Act).
- Should have topped up his existing loan instead of setting him up with a new loan.
- Unilaterally cancelled his payment protection insurance.
- Had not followed the correct unforeseen hardship process.
The lender said it was their usual practice to create a new loan agreement when a substantive change was made, and Theo’s top up had been a substantive change. They explained that they had tried to help Theo with a hardship application, but he had not given them the necessary information for them to assess it, so the application was declined.
Review
We discussed the PPI with Theo and explained it was unlikely that, even if the insurance had continued, he would have received cover. This was because his PPI policy had an exclusion for loss of employment caused by mental illness or disorder.
We asked Theo about his current financial position. He confirmed he’d moved overseas, was living with family, had no income and didn’t know when he’d re-start work, and was looking after his child. We could see that his hardship would be indefinite, and there was no way to know when he might be able to start making repayments.
We had some doubts about whether the lender had done enough to assess whether Theo could afford to borrow the additional $3,800. However, even if the (small) amount of interest and fees relating to the $3,800 top up was written off, Theo would still have had a very large overall debt to pay but no means to pay it.
To resolve Theo’s complaint, the lender offered to suspend Theo’s account for the next six months by not adding interest and fees, to give him time for his financial situation to improve. This meant Theo did not need to surrender his car. After the six months, or when Theo became employed, whichever came first, Theo would need to contact the lender to set up a payment plan. The lender suggested starting the payments small at $25 per week.
Resolution
Theo accepted the lender’s offer, and we closed our file.
Insights
This complaint is a good example of a lender recognising a borrower’s change in circumstances and working with the borrower to reach a resolution that suits both the lenders and the borrower’s needs.
