No affordability or suitability checks for consumer loan

In May 2019, Sandra applied for a loan of $2,500 for the purpose of “paying bills”.  The lender agreed to provide the loan. 

Sandra signed a loan agreement for $4,000. This was made up of the $2,500 loan and an extra $1,500 in fees and insurances as follows: 

  • $300 – loan application fee and a security registration fee, and
  • $1,200 for two add on-insurances (one was a fire protection policy and the other a payment waiver policy). 

She had difficulties in meeting the repayments and, in 2023, with the assistance of a financial mentor, complained about the lender’s decision to approve the loan. 

Sandra and the lender were not able to resolve the complaint between themselves, and FSCL took the matter up for investigation. 


The financial mentor said the loan to Sandra was unaffordable. While she was in employment, Sandra had only started her job two months before the loan. Sandra also had existing debts to a debt collection agency, Work & Income, and a high-cost short term lender. Further, Sandra had a gambling problem, which sometimes caused her bank account to go into overdraft. 

The financial mentor also said the lender had failed to check whether the add-on insurances were suitable for Sandra’s needs. 

The lender said it was not unusual for a borrower to have other loans and repayment commitments and this, on its own, is not a basis for a loan to be declined. They considered the loan was affordable based on Sandra’s income and expenses. 

With the insurances, the lender said they had explained them in detail to Sandra and that she had chosen to take them out.  



Under the Credit Contracts and Consumer Finance Act 2003 the lender is obliged to satisfy themselves that Sandra could afford to repay the loan without suffering substantial hardship.

We asked the lender for the information they had about Sandra’s ability to make repayments. The lender did not provide an affordability assessment. They said their assessment of affordability was based on Sandra’s previous loan records and three months’ worth of bank statements. 

We assessed Sandra’s income and expenses at the time she was offered the loan, using information from her bank statements and from the Statistics New Zealand Household Expenditure Survey. 

We did not consider it was wrong for the lender to have used Sandra’s income from her new job for the affordability assessment as this was the indicator of what her income would be once the loan was taken out. However, after assessing Sandra’s income against her expenses, she was left with a weekly surplus of $4.70. This was not a sufficient surplus, as it did not allow any changes in income and expenses. We found the loan was unaffordable, and that the lender should waive all interest, fees and charges under the loan contract. 


We asked the lender for the information they had about whether the insurances were suitable for Sandra. The lender did not provide any information, but believed they had explained the insurances fully to Sandra, and that she had chosen them. 

Given there was nothing to show that the lender had enquired into whether the insurances were suitable for Sandra’s needs and given the costs of the insurance against how much Sandra wanted to borrow initially to pay bills, we were not satisfied the lender had made reasonable inquiries.  We recommended the lender refund the $1,200 for the insurance premiums to Sandra’s loan account. 


Both Sandra and the lender accepted our preliminary decision, and we closed our file. 

Insights for participants

Lenders must take care when assessing loan applications to make reasonable inquiries to satisfy themselves the borrower can make the loan payments without suffering substantial hardship. If, after the assessment, the borrower only has a very limited buffer against unexpected expenses, and is already carrying debts, the loan may well be unaffordable. The lender should also document the inquiries they have made.

Lenders are also required to make reasonable inquiries to satisfy themselves that the loan will meet the borrower’s requirements and objectives. The lender responsibility principles also apply to credit-related insurance, such as payment waivers.