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Residual debt issue

In November 2021 Heremoana bought a car costing $45,000. The car dealer arranged finance and, including fees and interest, Heremoana borrowed $48,000 from the lender. By January 2022 Heremoana was struggling to repay the loan and he called the lender to explain that his wife’s working hours had been reduced. Heremoana asked if he could reduce his weekly payments from $350 to $80.

The lender needed more information about Heremoana’s situation and suggested Heremoana talk to a financial mentor. The financial mentor was concerned about the lender’s original decision to lend and complained that the lender may have breached its responsible lending obligations.

When the financial mentor and lender were unable to resolve Heremoana’s complaint, the financial mentor complained to FSCL.


The financial mentor said the lender had not exercised the care, diligence, and skill of a responsible lender as required by the Credit Contracts and Consumer Finance Act 2003 (CCCFA) because the lender had not checked the value of the car offered as security for the loan. Although Heremoana had paid $45,000 for the car, the financial mentor said it was only worth about $33,000. This meant that if Heremoana surrendered the car to the lender to sell the car to reduce his debt, he would be left with a considerable residual debt.

The financial mentor also had concerns about the affordability assessment, because the lender had included Heremoana’s wife’s income, but the lending was to Heremoana alone.

To resolve the complaint the financial mentor said Heremoana would surrender the car if the lender would extinguish the debt.

The lender did not agree to the proposed resolution and were satisfied its decision to lend met its obligations under the CCCFA saying:

  • if the car dealer had inflated the purchase price of the car, this was something Heremoana should take up with the dealer
  • it had included Heremoana’s wife’s income in the affordability calculation but had also included her expenses.


When a borrower defaults on a loan shortly after borrowing the money, this can indicate a problem with the affordability assessment. In this case, we considered it was reasonable for the lender to rely on Heremoana’s wife’s income and expenses when assessing loan affordability but noticed that the lender had not included expenses for the couple’s child. The lender’s affordability assessment recorded that Heremoana had no children, but the bank statements showed regular payments to ‘kindy’.

If Heremoana’s child was included in the affordability assessment, the family’s weekly budget was $45 in deficit. On this basis we said the lender had not met their responsible lending obligations under the CCCFA and that the lender should refund all the interest and fees and allow Heremoana to repay the loan at an amount affordable for him.

We considered the financial mentor’s submissions that the lender had not demonstrated the care, diligence, and skill of a responsible lender by accepting as security a vehicle that, if repossessed and sold, would leave Heremoana with a significant debt.

It was our view that the security offered was for the lender’s benefit, not Heremoana’s, and that the lender could have agreed to lend and taken no security at all. We noted the financial mentor’s concern that a car could be repossessed and sold a short time after purchase for a much lower sum than the borrower paid for it. However, the contract for the sale and purchase of the car was between Heremoana and the car dealer and it is a fundamental principle of contract law that the parties are free to negotiate the price of the object for sale.


The lender agreed to reduce the debt by refunding all the interest and fees charged. Although the financial mentor did not accept our comments about the value of the security, he said that Heremoana’s financial situation had improved and Heremoana could afford to keep the car. Heremoana offered, and the lender accepted, weekly repayments of $195 and the complaint was resolved on this basis.

Insights for consumers and participants Residual debt owing after a car is repossessed and sold is a significant problem in some cases. Although the CCCFA does not provide a specific remedy for dealing with residual debts, we may negotiate with the parties to try to find a resolution that will work for both of them.