The fine balance between affordability and unaffordability

In December 2018 Coral applied for a loan from a finance company to buy a car. Coral included two boarder’s contributions as income. The finance company called both boarders and checked that they were indeed living with Coral and paying $100 each, every week.

Taking into consideration both the new loan payments and 80% of the boarders’ income, Coral had a budget surplus of $180 a week. Without the boarder’s contribution Coral’s surplus was only $20. The finance company decided the loan was affordable and approved it. Coral bought the car and until November 2019 met every loan repayment on time.

Towards the end of 2019 the boarders moved out and Coral’s income dropped. She could no longer afford to feed her family and went to a financial mentor for help. The financial mentor contacted the finance company and asked for some hardship relief. The finance company gave Coral a three-month payment holiday.

 

Dispute

The financial mentor referred the complaint to FSCL, saying that the three-month repayment holiday was of little value, because at the end of three months Coral would be in a worse position than she was at the beginning of the period. The financial mentor said that on his calculation of Coral’s financial circumstances in December 2018, her budget was in deficit and the original decision to lend was irresponsible.

The finance company disagreed, providing detailed information to support its decision to lend.

 

Review

We reviewed all the information provided by the financial mentor and the finance company, comparing the different budgets. We were mindful of the fact that Coral had been able to afford the loan repayments until the boarders moved out. The finance company explained that it based its assessment of Coral’s financial situation on aggregated data for the costs of a family of three adults and two children, while the financial mentor said they used Coral’s actual costs. For example, the financial mentor included $120 for petrol alone, while the finance company included only $50 for all car related costs.

We explained to the financial mentor that if we were to conclude the lending was irresponsible, we would expect the finance company to wind back the transaction to December 2018. This would mean that Coral would need to voluntarily surrender the car and the finance company would have to refund all the interest and charges owing.

The financial mentor said that Coral had recently started working and needed the car for transport. Without the car Coral would have to resign from her job, worsening her financial situation. The financial mentor also said that since Coral had started working, she had been making regular loan repayments and was also able to pay a little extra to reduce the arrears that had accumulated.

 

Resolution

The financial mentor agreed to discontinue Coral’s complaint and we closed our file.

 

Insights for consumers and participants

Sometimes a borrower’s budget is so far in deficit that it would be impossible to repay the loan and meet the necessities of life and it is easy to conclude that the lending was irresponsible.

However, sometimes loan affordability is much more subjective. Provided a lender has allowed a reasonable amount for necessary living expenses, taking into consideration the borrower’s individual circumstances, loan repayments, and costs related to the new loan, it is difficult to find the lender’s decision is reasonable.

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