Insights for consumers and lenders
It is in the borrower’s interest to read the terms of the loan carefully before signing up to borrow money and to ask any questions if unsure about how interest is to be calculated. Equally, lenders should ensure that the terms of the loan are communicated clearly and accurately to the borrower during the loan application process. Information in the loan documentation should reflect what has been discussed and should be clear and easy to understand.
What happened?
In March 2024, Connor* applied for a $50,000 business loan with the lender. Connor’s wife, Florence*, was the director of the company and during the application process, she authorised Connor to act on her behalf. She also agreed to guarantee the loan. During the loan application process, the lender communicated primarily with Connor and spoke with him several times. Following a credit assessment, the loan application for the full loan amount was approved. The lender asked to speak with Florence to discuss the loan terms, but because she was unavailable, the lender discussed the loan terms with Connor instead. On 17 March 2024, the lender emailed the loan documents to Florence, and she signed and returned the loan agreement to the lender.
In August 2024, Connor contacted the lender to query the interest rate and additional $2,000 added to the loan. Connor said that the interest rate of 27% per annum and the $2,000 origination fee were never disclosed to him at the time of taking out the loan and he had only been made aware of the rate and fee when the lender provided a statement.
Connor complained to FSCL and said that the lender had misled him and Florence by not disclosing all the information. He also said the interest being charged was too high. Connor requested that the origination fee and some of the interest charges be credited to the loan account.
The lender explained that while a full breakdown of the loan, including the origination fee and annual interest rate, had not been discussed during their telephone calls with Connor, he was informed of the daily interest rate and the total loan repayment amount of $68,628.15. The lender also said that Florence had reviewed and signed the loan documentation, which clearly set out the correct daily interest rate of .079% and the origination fee. The lender also noted that the annual simple interest rate of 15.41% was disclosed in the agreement.
What was FSCL’s view?
We asked the lender to explain the difference between the various interest rates discussed with Connor and set out in the loan agreement, as the information was confusing. The lender apologised for the confusion and confirmed that the applicable interest rate was the daily rate set out in the signed loan agreement. The lender provided a further comparison of the daily rate, annual simple rate, and annual percentage rate and explained that when the daily rate is annualised, the rate equates to approximately 28.84% (annual percentage rate) which is close to the 27% interest rate Connor thought he was being charged.
We accepted the lender’s explanation and formed a preliminary view that Connor’s complaint should be discontinued. We explained to Connor that the information set out in the loan agreement was correct and contained enough information for him and Florence to understand the total cost of borrowing. Further, Connor and Florence had the opportunity to review and understand the terms of the loan before Florence signed and returned the agreement. We did not hear back from Connor regarding our preliminary view and we closed our file.
