In May 2022, Aadan obtained a loan from a lender for $3,650. Repayments were $50 per week. The loan was for two years with an interest rate of 29.95% per annum and was secured by his car. Aadan was able to make his loan repayments between May 2022 and March 2023, but missed his payments from April 2023 onwards.
Worried that the lender might repossess his car if he continued to be unable to pay, Aadan contacted a financial mentoring service for help. The financial mentoring service was concerned that Aadan’s loan had been unaffordable from the start.
With the support of a financial mentor, Aadan complained to FSCL.
Dispute
Aadan complained that his loan was unaffordable. He said that the lender had not included essential expenses like his power, phone, insurance or clothing costs in their affordability assessment and they had listed his rent as one third of the actual cost. Aadan said that he was struggling to provide for his children and repay the loan. He also questioned whether the lender should have charged him $293 for a repayment waiver. Aadan believed that the lender had not complied with their responsible lending obligations under the Credit Contracts and Consumer Finance Act 2003 (the Act).
The lender said that Aadan’s hardship was caused by a change to his circumstances in April 2023, not because the loan was unaffordable. They said that they relied on what was in Aadan’s bank statements to determine his expenses, when approving his loan.
Review
The lender should not have excluded Aadan’s essential expenses just because they were not shown on Aadan’s bank statements. When we reassessed Aadan’s budget and spoke to Aadan about what his expenses were at time he signed the loan agreement, we could see that his rent payments and his day-to-day expenses were higher than what the lender had listed in their loan affordability assessment. On our assessment of his budget, Aadan had a weekly deficit of $5. This meant that the loan was unaffordable.
We agreed that the repayment waiver was unsuitable for Aadan. A repayment waiver provides cover where a person dies, suffers permanent physical disablement, or is unable to work because of accident or illness. Aadan wasn’t working when he got the loan, so the repayment waiver provided little, if any, benefit.
We found that the lender had failed to meet their responsibilities under the Act because they could not have been reasonably satisfied that Aadan could make loan repayments without suffering substantial hardship. We said that the lender should waive all interest, fees and charges under the loan agreement from the start and refund the $293 repayment waiver.
Resolution
Both Aadan and the lender accepted our view, and we closed our file.
Insights for lenders
It is important that lenders include all essential living expenses when assessing affordability. If an essential expense is missing from the financial information provided by the borrower, the lenders should ask the borrower for more information.
