In September 2020, Fetu borrowed $15,500 from a lender to buy a car and the loan included an amount of $1,240 for mechanical breakdown insurance. Fetu’s loan was for 3 years at an annual interest rate of 29.95%, with total payments over the life of the loan amounting to $23,000. The weekly payments were $150.
Fetu was the single parent of three children, and his WINZ benefit was his sole source of income.
Fetu had difficulty paying his loan within the first two months. He asked for hardship assistance, but his lender declined saying he hadn’t had his loan long enough. Fetu said that the loan was unaffordable, and he complained to FSCL.
Dispute
Fetu said that he didn’t know how he qualified for the loan – he said that it was unaffordable from the get-go. He struggled to pay and had to rely on friends and family to meet his payments.
The lender said that the loan was affordable. They said that Fetu’s repayment issues were due to Fetu needing to help pay for a funeral, which was an unforeseen event that happened after the loan agreement was signed.
Review
We found that the lender had not completed a satisfactory assessment of Fetu’s expenses. The lender’s assessment appeared to use general statistics for expenses, didn’t consider Fetu’s three children, and didn’t accurately record his rent or grocery costs. This meant that, when FSCL recalculated Fetu’s estimated expenses, he had a weekly deficit of $220. This meant that Fetu’s loan was unaffordable.
We were concerned with the lack of information that the lender had for Fetu’s affordability assessment, including that they didn’t have details of Fetu’s actual expenses nor were they able to provide an explanation about how they calculated the affordability. We found that the lender had likely breached their obligation to make reasonable inquiries to ensure that Fetu could pay without facing substantial hardship, as required under the Credit Contracts and Consumer Finance Act 2003.
We recommended that the lender refund the fees and interest charged on Fetu’s loan, as well as the mechanical breakdown insurance premium. Fetu had already paid about $19,000 towards his loan. After refunding the fees, interest and insurance to his loan account, Fetu had paid more than the total amount due for his loan. This meant that the lender had to refund Fetu a cash amount of $6,100.
Resolution
The lender and Fetu accepted our recommendation, so we closed our file.
Insights for lenders
Lenders must ensure that affordability assessments are completed for each consumer. The affordability assessment should take into account the consumer’s actual and reasonable expenses at the time that they are taking out the loan.
