Kate has been the customer of the same lender since 2012. During that time, she has borrowed relatively small amounts, about $1,000, on an unsecured basis.
In 2018, Kate was involved in a serious car accident. The car was uninsured and unable to be repaired, so Kate approached the lender for a loan to buy a replacement car. The lender agreed to lend Kate $7,000, adding it to her existing debt, bringing her loan balance to $9,000. The lender also took security over the car.
Kate told the lender about losing her previous car in an accident and said that she did not want to be left in the same position again. At the lender’s suggestion, Kate arranged car insurance herself directly with an insurer. The lender arranged income protection insurance for Kate, but did not mention guaranteed asset protection (GAP) insurance. GAP insurance covers the difference between the amount the insurer agrees to pay and the amount owed to the lender, if a car is written-off in an accident.
In 2019 Kate’s new car was written-off in an accident. Kate’s insurance claim was accepted, and the insurer said it would pay $4,500 directly to the lender.
Kate told both the insurer and the lender that she did not consent to the insurance payment going to the lender. Kate asked the insurer to pay the money to her. She would buy a new car and then give the lender security over that car.
The lender did not agree to Kate’s suggestion, and referred to the loan agreement saying Kate had agreed that any insurance proceeds would be paid directly to the lender. The lender was happy to finance Kate into another car but it would not consent to the insurance proceeds being paid directly to Kate.
Kate said the lender was being unreasonable and complained to FSCL.
Kate said she had arranged the insurance with the insurer and the insurance proceeds belonged to her. Kate understood that by giving the car as security, she was agreeing that if she did not repay the loan the lender could take her car
Kate said the lender did not tell her about the insurance clause in the loan agreement when she signed the loan agreement, or explain what would happen if the car was written-off in an accident. Kate also suggested that the loan agreement had been altered after she signed it, adding the insurance clause without her knowledge. Kate insisted the lender produce the original loan agreement, rather than the scanned copy it had provided.
The lender maintained its position that it was entitled to rely on the loan contract, obliging Kate to agree to the insurer paying the insurance proceeds directly to it. The lender was unable to produce the loan agreement with Kate’s original signature but said that the insurance clause was standard and had not been added after the agreement was signed.
Kate also complained that the lender did not tell her about GAP insurance in 2018 when she added the car as security to the loan. Kate said that after the $4,500 was paid to the lender she would still owe $3,000. If she had GAP insurance Kate said the entire loan would have been repaid and it was not fair that she was left with no car and a debt of $3,000.
With respect to the GAP insurance, the lender said that Kate was not eligible because her loan was essentially a mixture of secured and unsecured lending. GAP insurance will only cover the difference between the amount paid by the insurer and the amount owed on a car. Because Kate had existing unsecured lending this could never be covered by GAP insurance. The lender said it would have been inappropriate to sell Kate GAP insurance because she could not have claimed against it to cover the residual debt owing.
We told Kate that under the loan agreement she was obliged to authorise the insurer to pay the insurance proceeds to the lender. Although Kate might not have known this when she signed the loan agreement, there is no obligation on a lender to explain every clause to a borrower. A borrower carries some responsibility to read the loan agreement before signing it. We also reassured Kate that the insurance clause is a standard provision. We did not accept that the lender had fraudulently altered the loan agreement after Kate signed it.
With respect to the GAP insurance, we accepted that it would only cover the difference between the amount paid by the insurer and the amount owing on the car.
We then considered what would have happened if Kate had separated the 2018 secured loan out from the earlier, and later, unsecured loans. After the insurance proceeds were paid, Kate would be left with a residual balance of about $3,000.
Given that Kate:
- had existing debt of about $2,000 before she bought the car
- had borrowed an additional $1,500 just before the accident
- would have had to pay the premium on the GAP insurance
we considered Kate was in substantially the same position she would have been in had she bought GAP insurance to cover the 2018 lending.
We suggested to Kate that the lender’s offer to finance another car seemed like a good way forward for her.
Kate did not accept our explanation and we formally recommended that Kate discontinue her complaint.
Insights for consumers
When you give a lender security over your car, the security reassures the lender that if you stop making the loan repayments it has an asset it can recover and sell. Many borrowers would not necessarily think about what might happen if their car is damaged in an accident. To protect the car, loan agreements usually require you to insure the car. The loan agreement will likely go on to say that if the car is written off in an accident, you agree that the insurance proceeds will be paid to the lender and your debt will reduce by the same amount.