Contact us

0800 347 257

Residual debt unaffordable

When Jason and Maggie bought a new car in August 2021 the car dealer helped them apply for a loan of about $30,000. The car dealer gathered information about Jason and Maggie’s financial situation and the lender calculated their joint weekly income was $1,461.73 and their joint expenses were $1,083.38, leaving a budget surplus of $378.35. After the loan repayments of $216, Jason and Maggie had a budget surplus of $162.35 per week.

Within one month of borrowing the money the loan was in arrears and Jason and Maggie were struggling financially. They went to see a financial mentor who had concerns that the loan might not have been affordable in the first place. Jason and Maggie decided they could not afford to keep the car so, about seven months after buying the car, they surrendered it to the lender. The lender sold the car for about $6,500, leaving Jason and Maggie with a debt of about $24,000.

With the financial mentor’s help, Jason and Maggie complained that the loan was not affordable. The lender was satisfied that their affordability assessment showed a budget surplus, and that Jason and Maggie could afford the loan repayments. Jason and Maggie did not agree and complained to FSCL.


The financial mentor said Jason and Maggie’s bank statements showed that they were not in a financially stable position, with accounts frequently overdrawn. The lender had failed to take into consideration Buy Now Pay Later (BNPL) expenses and childcare costs, as well as under-estimating their petrol expenses.

The financial mentor also said that the lender had over-estimated Maggie’s income, her employer had recently loaned her $1,000 and her payslips showed that she was repaying this debt at $105 a fortnight directly from her wages.

The financial mentor calculated that Jason and Maggie had income of $2,889.53 and expenses of $3,129.80 a fortnight.

The lender continued to maintain their affordability assessment was accurate saying they:

  • had based the income on the previous three months’ bank statements
  • did not include BNPL costs because this is short-term lending
  • the childcare costs did not appear on the last week of the bank statements, so were not included in the affordability assessment
  • $100 a week for petrol was excessive.


We were not satisfied that the lender had met their responsible lending obligations under section 9C(3)(a)(ii) of the Credit Contracts and Consumer Finance Act 2003 because the lender had not satisfied themselves that Jason and Maggie could afford to repay the loan without suffering substantial hardship.

We began by looking at Jason and Maggie’s income. Jason’s income was stable, but Maggie’s varied slightly. Based on the bank statements and allowing for the $105 loan repayment, we calculated the family’s weekly income as $1,444.76, not too far away from the lender’s calculation of $1,461.73.

We then looked at the family’s expenses and were concerned that the lender had failed to consider:

  • BNPL payments
  • childcare costs
  • the family’s full living costs.

We acknowledge that BNPL can be problematic for lenders assessing loan affordability because the contracts are short-term, no longer than six weeks. It is our view, based on the guidance in the Responsible Lending Code, that a lender needs to be satisfied that, on the date the first loan payment is due, there will be enough money available to meet the new loan payment, the borrower’s living costs, and the borrower’s other financial commitments which include BNPL.

Looking at the most recent six-week period on the bank statements supplied, Jason and Maggie had 15 BNPL deductions from their bank account, and in the most recent week $96.92 was deducted from Jason and Maggie’s bank account for BNPL payments. We considered it was reasonable to assume at least some of these BNPL payments would continue and that $96.92 per week for BNPL commitments should have been allowed in the lender’s affordability assessment.

The bank statements also showed regular fortnightly payments of $150 to a childcare centre, but because the payment did not appear in the most recent fortnight the lender excluded it from their calculations. The financial mentor explained that the family had temporarily withdrawn their child from childcare because of Covid-19 concerns but, as working parents, this expense would continue.

We also thought that the lender had under-estimated the family’s living costs and had not factored in the running costs of the new car.

If only one item had been under-estimated or excluded, the $162 budget surplus might have been sufficient but, taking all the items together, the family were unable to repay the loan and cover their living expenses and existing financial commitments.

We found that the lender was obliged to refund the interest and fees charged over the life of the loan, reducing Jason and Maggie’s debt to $19,000. We noted that the residual debt of $19,000 was a considerable amount of money and asked the parties to suggest what they would consider to be a fair outcome to repay that debt.

In the financial mentor’s view, a fair outcome was for the lender to write off the $19,000 balance owing. He went on to say that Jason and Maggie’s financial situation had worsened after they surrendered the car. Maggie had resigned from her job to care for their two small children. This drop in income meant that repaying $19,000 was completely unobtainable for Jason and Maggie and, if this was the best outcome offered, his advice was that they should apply for a no asset procedure.

The lender was not prepared to write off the debt as, without reviewing Jason and Maggie’s bank statements, it was impossible to know their current financial position. We accepted the lender’s observation and asked Jason and Maggie for their bank statements for the last three months.

Jason and Maggie did not respond to our request and were also not responding to the financial mentor. As we could not wait indefinitely for information that might have helped us negotiate a reasonable repayment programme for Jason and Maggie, we issued our final decision.


We said that the lender should reduce Jason and Maggie’s debt from $24,000 to $19,000 and, if the lender intended pursuing Jason and Maggie for the $19,000 owing, they could ask for our help in negotiating a repayment agreement.

Jason and Maggie did not respond to our final decision, so we closed our file.

Insights for consumers and participants

When reaching a decision, we must take into account what is fair and reasonable in the circumstances. In this case, the law required the lender to refund the interest and fees charged on the loan but, because the residual debt was so high, we asked the lender to consider also reducing the debt to an amount that Jason and Maggie may be able to pay off over time.  We thought this may be a fairer outcome in the particular circumstances of this case. We cannot require a lender to reduce a debt, and, in this case, the lender was not willing to consider a debt reduction unless Jason and Maggie provided more information which, unfortunately, they did not do.