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When a business loan is not a business loan

In 2021 Linh started a business, and took out a loan to purchase a van for the business. A few months later, in January 2022, Linh borrowed a further $53,000 from the lender to purchase another vehicle, a ute, with weekly loan payments of $279. Linh signed a declaration that the ute loan was for business purposes. This meant the responsible lending provisions of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) didn’t apply.

Linh’s first payment was due on 3 March 2022. On 10 March, Linh contacted the lender with her daughter Anh translating. Linh said she wanted the ute loan payments to come from her son’s account, and that she would be overseas for 8 months. The lender didn’t agree and said the payments needed to come from an account in her own name.

Linh made the ute loan payments regularly, but the business started to struggle and by August 2022 she couldn’t make her payments. In October 2022, Linh forfeited the ute to the lender, it was sold, and this brought the loan balance down to $24,000.

Linh complained to the lender that she hadn’t been able to afford the ute loan from the beginning. The lender said that this was a business loan, not a consumer loan, and although they’d taken some steps to check affordability, this was not under the more strict requirements for a consumer loan under the CCCFA. With the assistance of a financial mentor, Linh brought her complaint to FSCL.

Dispute

Linh’s financial mentor explained that Linh did not speak English and did not understand that the contract was for a business loan. Further, the ute was not for business purposes but for personal use, so the loan should have been a consumer loan with the protections under the CCCFA applying.

The mentor also said the loan was really for Linh’s son Liem, but because Liem was not eligible for a loan, the car dealership told Linh to sign the contract instead ‘to make the buying possible’. There were also some questions around whether Anh and Liem were with Linh to assist her to understand the loan contract when she signed it.

The lender remained of the view this was a business loan. They said they train car dealerships to be aware of any vulnerabilities that a customer may have and to give them the opportunity to seek help understanding the loan. In this case, the lender said that Linh’s family members had assisted her to understand the contract.

Review

In our phone calls with Linh and in calls she’d had with the lender, Anh would translate for Linh and at one stage, Linh had asked the lender to provide a translator. We accepted Linh’s recollection that Anh and Liem were not with her when she was signing the loan contracts. In our view, Linh was a vulnerable consumer because of language barriers, and the lender should have offered translation support.

We were not satisfied Linh understood she had entered into a business loan, and we thought it was more likely than not that the ute was actually for personal use, meaning the ute loan should have been a consumer loan. We reached this view because:

  • Linh had asked for Liem to make the loan payments, and because Linh said she was going to be overseas for 8 months, it appeared the business would not be operating during that time, so the ute wasn’t needed for the business.
  • Linh already had a business vehicle (the van) which she’d bought only a few months before buying the ute. It seemed unlikely the business needed another vehicle so soon.
  • In conversations with the lender, Linh talked about the van being for business use. There were no similar conversations in relation to the ute.

Because the ute loan should have been a consumer loan, we looked at Linh’s financial situation against the CCCFA affordability criteria and could see she could not afford the loan from the beginning. Further, there was evidence that the loan caused Linh substantial hardship – she fell behind in her payments less than six months after taking out the loan.

We also thought there was possibly an ‘unconscionable bargain’. If the car dealership knew that Linh was taking on legal liability for a loan that was actually to benefit Liem, who possibly also translated for her on the day the loan contract was arranged, this was a red flag that Linh may have needed to receive independent advice.

Resolution

We asked the lender to suggest a reasonable settlement offer. They offered to write off half the remaining loan balance, taking it down to $12,000, and freezing the balance at that amount. This was essentially the same outcome as the usual remedy for breaching the affordability requirements under the CCCFA, which is to write off all interest and fees changed on the loan. The parties agreed that Linh would pay the remaining $12,000 off at $50 per week.

As the complaint was resolved, we closed our file.

Insights

This case highlights to consumers how important it is to seek advice if they don’t understand the contract they are signing, and to let their lender know if they do not understand and need the assistance of a translator.

This case is also a reminder to lenders that they must provide reasonable support for borrowers who do not speak English, so that they can understand the contract they are signing. If the lender had done a better job in this case, it would have been clear that the ute was not being bought for the business but for personal use, meaning that this needed to be a consumer loan, not a business loan.