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Lender made reasonable inquiries before approving a loan

Chen took out a $5,600 personal loan, which she used to consolidate her existing debts and to pay bills. The lender believed Chen could afford the loan repayments. It calculated that she had a budget surplus.

The lender included boarder income in its calculation. Chen told the lender she received board in cash, and provided a letter from her two boarders, which set out how much they paid her.

After the loan was taken out, unbeknown to the lender, Chen fell into financial hardship. She struggled to buy food and pay her power bill. A financial mentor helped Chen get an interest free loan to repay all but $200 of the amount owed to the lender. With the financial mentor’s help, Chen then complained to the lender about the loan, saying it was never affordable.

The financial mentor wanted the lender to compensate Chen for the interest and fees she had paid on the loan, and for Chen’s stress and anxiety. The lender wrote off the remainder of Chen’s account balance, which was increasing due to fees and interest, but it did not agree the loan was unaffordable.

We started an investigation because the parties were unable to come to an agreed outcome.


The financial mentor believed the lender had not lent responsibly. Chen was already struggling with her existing debts, and the boarder income was not reliable or dependable.

The financial mentor also believed the loan was not suitable for Chen because it had a higher interest rate than one of the existing loans Chen had consolidated.

The lender believed it had lent responsibly. It obtained evidence of Chen’s income and made inquiries about her expenses. In its affordability assessment, it used higher amounts for utilities, food, and entertainment costs than Chen’s actual expenses.

The lender also believed the loan was suitable for Chen’s needs. She was able to consolidate her debts into one loan and had money to pay other bills.


We concluded that the lender had complied with the lender responsibility principles set out in the Credit Contracts and Consumer Finance Act 2003. The lender had made reasonable inquiries about Chen’s income and expenses, and her objectives for the loan.

Board can be included when assessing a borrower’s income, but the lender should make inquiries to verify its existence. The lender should also include food and other household expenses for the boarders in their affordability assessment. In this case, we were satisfied the lender had made reasonable inquiries about the boarder income and expenses.

The lender was not obliged to compare the interest rate of its proposed loan to Chen’s existing debts. However, we were concerned that Chen may have paid less interest if she had not consolidated the existing debt which had a lower interest rate. The difference in interest equated to around $100.


The lender made a goodwill offer of $500 to resolve the complaint, which Chen accepted.

Insights for participants

When we receive a complaint that a loan was not affordable, our role is to investigate the inquiries the lender made before they entered into the loan agreement with the borrower.

When we find the lender did not make reasonable inquiries before entering into the loan, we usually recommend that the lender should refund all interest and fees they charged on the loan. However, we are unlikely to recommend this outcome where the loan was, in part, to consolidate debt. The borrower would always have needed to pay interest on the original debt.