Overpayments do not always reduce the loan principal

In September 2015, Aadavan entered into a loan for $20,915.31, to purchase a Mini Cooper.

Aadavan sells the Mini

In 2016, Aadavan agreed to sell the Mini to a car yard. Aadavan did not advise the car yard the lender still held security over the vehicle (Aadavan still having a balance to pay on the loan). The car yard also did not check whether there was any security interest on the vehicle. Aadavan continued to pay the loan to the lender.


Aadavan falls into hardship

In February 2017 Aadavan fell into financial hardship after losing his job and he missed some loan payments. In July 2017 the car yard paid the lender the amount outstanding on the loan ($9,587.60), bringing the loan agreement to an end. The car yard then sought payment of that amount from Aadavan, which he continued to pay.


Payment review

In late 2017 Aadavan reviewed his and the car yard’s payments to the lender. He calculated the lender had been overpaid $2,492.79. Aadavan wanted the lender to pay that amount to the car yard. Aadavan would then have approximately $1,000 left to pay the car yard, instead of $3,500.

Aadavan said that in most months during the life of the loan he had paid more than the monthly instalment amount of $750.85. In some months he paid up to $1,600, in other months he made no payments, and some months he paid less than $750.85. Aadavan considered that because he generally made payments at more than the scheduled repayment amount, the loan principal should have been reducing more quickly and the amount of interest that accrued on his loan should have been less.


The lender’s view

The lender said any monthly overpayments did not pay down the principal, but were credited towards the next scheduled payment the following month. The lender pointed to a section in its terms and conditions saying this was how overpayments would be dealt with.


The complaint

Aadavan remained of the view the lender had been overpaid and he complained to FSCL. Aadavan also complained the lender did not correctly assess his application to vary the credit contract when he fell into financial hardship.


Our review


Aadavan’s payments

We considered it was correct for the lender to rely on the loan terms and conditions about not applying overpayments towards the principal, but instead putting them towards the next month’s scheduled payment amount.

We reviewed all the payments towards the loan and calculated how Aadavan’s overpayments had been applied to the following month’s instalments. We also calculated how standard interest, default interest, and fees were added to the loan balance. We found that Aadavan had overpaid the lender $186.05. The lender did not agree it had been overpaid but, in the interests of resolving the complaint, was prepared to refund that amount to Aadavan. We considered this was a reasonable offer.



Aadavan first contacted the lender about falling into unforeseen hardship on 6 February 2017. That day the lender asked Aadavan to provide information about the cause of his financial hardship, how long he expected to be in hardship, and his proposal on how the loan should be varied. Aadavan answered the lender’s questions on 7 February.

On 18 April, the lender contacted Aadavan again, asking him the same questions he answered on 7 February, and asking Aadavan for evidence to support his application. Aadavan replied to the lender on 18 April providing the same answers to the questions he had provided on 7 February, but without any of the evidence the lender asked him to provide.

On 27 April the lender emailed Aadavan again asking him to fill out an application form and provide evidence to support his application. On 2 May, Aadavan replied and said he had already provided the information. On 9 May, the lender contacted Aadavan and again said he needed to provide his application and supporting evidence. Aadavan said he was still waiting for the lender to send him an application form. Critically, on 9 May, the lender said ‘there was no application form, and simply to answer the questions below’. Those were the same questions Aadavan had answered on 7 February and 18 April, so Aadavan did not reply.

The lender then emailed Aadavan on 18 May saying his hardship application had been declined because he had not submitted an application form.


The Credit Contracts and Consumer Finance Act 2003 (the CCCFA)

Under section 57A(1)(c) of the CCCFA the lender was required to, within 20 working days after 9 May:

a)                  Decide whether to change the consumer credit contract in line with Aadavan’s proposal and give him written notice of the decision.

b)                  If the lender did not agree to change the contract, give Aadavan its reasons, and tell him he could apply to court if he did not agree.

The lender did not follow this process, and Aadavan lost the opportunity to have his hardship application fully considered. We noted Aadavan had sold the Mini to the car yard in 2016, before he fell into hardship. This meant the fact he lost the opportunity to have his hardship application fully considered did not affect his decision to sell the Mini.

However, we said the lender should consider increasing its offer of compensation by $500 (to a total of $686.05) in recognition of the inconvenience Aadavan had suffered in losing the opportunity to have his unforeseen hardship application fully considered. The lender agreed to offer Aadavan $686.05 in full and final settlement of his complaint.


The outcome

We formally recommended that the lender’s offer was a reasonable one. Aadavan did not accept our recommendation and we discontinued the investigation.


Key insight for participants

Among other things, the June 2015 amendments to the CCCFA set out more prescriptive requirements for lenders in assessing unforeseen hardship applications, and it is important lenders and their staff are well aware of these requirements. Further guidance on the requirements can also be found in section 12 of the Responsible Lending Code.

In addition, we also suggest lenders tell borrowers they can contact FSCL as an alternative to applying to court, if the borrower does not agree with a lender’s decision on an unforeseen hardship application.