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The debt spiral

Over the course of 3 years, Cheryl entered into 11 loans with a lender. These were for new advances, and to refinance existing loans. Most of the loans were for the benefit of Cheryl’s family members, and she was often co-borrower on the loans.

By late 2017, Cheryl was on the 11th loan which was a culmination of all the loans entered into over the years. Cheryl then stopped making payments because she considered she had already paid off all the loans. In February 2018, the lender reactivated Cheryl’s direct debit authority and began debiting $30 per week from her bank account.

The lender felt it had ‘helped Cheryl and her family out’ by granting the loans. It said Cheryl needed to continue making payments until the debt was paid in full.



Cheryl had been making payments towards the loans for years, and felt she would never pay back the debt. In addition, Cheryl said the lender had breached the direct debit authority when it started debiting the $30 from her bank account. Cheryl did not want to make any further payments, and she complained to FSCL.



All the loans were entered into before the responsible lending provisions of the Credit Contracts and Consumer Finance Act 2003 (the CCCFA) came into force in June 2015. This meant the lender was not obliged to check that Cheryl could afford the loans, and that they were meeting her requirements and objectives. We noted that the loans were primarily for the benefit of Cheryl’s family members.

We also reviewed the history of all the loans and told the lender that if they had been taken out after June 2015, we would have serious responsible lending concerns because:

  • All the loans had fees added upfront for repayment waivers. However, some of the repayment waivers were unsuitable. For instance, on one loan (where Cheryl was a co-borrower with her son), the repayment waiver was in her son’s name. However, this was for redundancy cover, and Cheryl’s son was a beneficiary at the time the loan was taken out. This meant it was unlikely he could ever have benefitted from the repayment waiver.
  • There was also little consideration of the ability of Cheryl and the co-borrowers to afford the loans.


How much did Cheryl have to pay?

Cheryl was required to pay $31,500 over the life of loan 11, including the initial unpaid amount, fees, and interest. There had also been further advances totalling $9,000 (after June 2015), and debits of $3,500 (for fees, and default interest), over the course of the loan.

Because the loan was entered into prior to June 2015, we said that the amount of $31,500, and the $3,500 in fees and default interest were payable. We also said that Cheryl was obliged to pay back the additional $9,000 principal that had been advanced. Cheryl had paid $24,000 towards loan 11. This meant she had approximately $20,000 remaining to pay.


Our further concerns

However, we doubted whether the lender had checked that the further advances of $9,000 were affordable or suitable for Cheryl (which it was required to do after June 2015). Cheryl also told the lender that she had lost her job in September 2015. Although the lender agreed to reduce her payments from $215 to $110 per week, the lender did not follow the correct hardship process set out in the CCCFA. Cheryl continued to struggle to pay the loan, and we could understand why she felt she would be paying it back forever.

The lender had also breached the direct debit authority by not notifying Cheryl that it was going to reactivate the authority, in February 2018.



In all the circumstances, we said the lender should reduce the balance of the debt by 30% (to $14,000), and freeze the balance at that amount. At $30 per week, it would still take Cheryl 9 years to pay the debt in full.

Although the lender did not agree with our reasoning, it agreed to reduce the debt to $14,000 and freeze the balance at that amount. Unfortunately, Cheryl felt she should not be required to pay the lender anything more, and she abandoned her complaint.


Key insights for complainants

Unfortunately, it is common for us to investigate complaints where parents have taken on debt on behalf of children. Although the responsible lending regime means that loans should no longer be granted in situations similar to Cheryl’s, this complaint is a timely reminder to seek independent advice if you want to help out your children or other family members by taking on debt.


Key insights for participants

We could understand that the lender felt that it was helping Cheryl and her family members by lending them money when they were facing difficulties. However, the lender was unduly influenced by Cheryl and her family’s wishes. The lender should have given greater consideration to the fact that the family was moving further and further into debt.