On 9 November 2023, Maeve’s small business took out a $14,490 loan with a 12-month term. Maeve and her husband signed the business loan as guarantors. The weekly repayments were $370, the annual interest rate was 35%, and the total repayment over the life of the loan was $19,600. Maeve and her husband were the only employees of the business.
On 20 December 2023, Maeve made a hardship application for the business loan because she had to travel overseas unexpectantly for a family emergency for several weeks and couldn’t work. The lender agreed to reduced payments for four weeks. Maeve did not pay the reduced payments, but she did make most of the other weekly payments over the life of the loan.
In April 2024, Maeve made two lump sum payments of $6,000 each to repay the outstanding loan balance. Maeve said that she had refinanced the loan to her bank to be able to make the lump sum payments. Maeve said that the business loan had been unaffordable from the beginning. The lender said that the loan had been repaid, and the account closed with all obligations met.
Maeve complained to FSCL.
Review
We explained to Maeve that a lender’s obligations differed between a consumer loan and a business loan. Because this was a business loan, the responsible lending obligations in the Credit Contracts and Consumer Finance Act (CCCFA) did not apply. This meant that the lender was not required to complete a detailed affordability assessment before granting the loan.
We could see that Maeve and her husband had intermingled their business expenses with their personal expenses, making it difficult to assess the affordability of the business loan from their bank statements. Calculating the estimated income and expenses, we found that the loan appeared to be affordable at the time it was granted. This was whether we looked at the business expenses/income alone, or their business and personal expenses/income together. It seemed likely that Maeve’s difficulty paying the loan was caused by the family emergency in December 2023, not because the loan was unaffordable from the outset.
We recommended that Maeve discontinue her complaint.
Resolution
Maeve did not respond to our recommendation, so we closed our file.
Insights
A lender’s responsible lending obligations under the CCCFA apply only to consumer credit contracts. They do not apply to business loans. However, when looking at complaints about business loans, FSCL still assesses whether there was enough room within a business’s budget to pay the loan instalments. There must be enough evidence to show that the business likely had the means to pay the loan, otherwise, we may consider the lender’s decision to lend to be unfair. In Maeve’s case, we could see that the business likely did have means to pay, so her complaint was not upheld.
