New car and new debt

Felix borrowed $6,000 from a lender to buy a car and agreed to repay the loan at $100 per week. Felix found the car expensive to run, and decided he wanted to buy a new one. However, Felix would need more money for a new car, so he approached the lender again for a new loan.

The lender agreed to refinance the balance of Felix’s existing loan, which was about $3,000, and lend a further $5,000 to Felix for a new car. This meant Felix’s debts would be merged into one loan of $8,500. Felix agreed to repay the new loan at $125 per week.

Felix bought the new car and made repayments on the new loan smoothly for a couple of months. However, Felix soon started missing repayments, and default fees and interest began to accrue on the loan. The situation deteriorated further when Felix fell ill with cancer and lost his income. Felix managed to make sporadic repayments for a year, but during this time the debt ballooned to $15,000, with all the default fees and interest building up.  

Felix went to see a free budget adviser who found that Felix’s budget didn’t have room to meet the repayments, and never did. The budget adviser complained to FSCL on Felix’s behalf, because she was concerned the lender had approved the loan to Felix without properly assessing whether it was affordable for him. The budget adviser also complained the lender had not fairly considered Felix’s hardship situation.

 

Dispute

When approving Felix’s new loan, the lender had reviewed one month of Felix’s bank statements, which the lender said usually allowed them to make a fair assessment of a borrower’s income and expenses and the loan’s affordability. The lender thought Felix’s loan was affordable because he had disposable income that could be adjusted in his budget to meet the loan repayments. Furthermore, Felix’s existing weekly repayments were only increasing by $25 under the new loan, and he hadn’t had any problems making repayments in the past.

However, the lender admitted that in Felix’s case, one month of bank statements didn’t provide an accurate record of his income and expenses, and they hadn’t made enough enquiries about Felix’s budget. It transpired Felix had fluctuating income from boarders, and the lender didn’t realise Felix also had children to account for in his budget. The lender also acknowledged they failed to take into account a separate loan Felix was repaying to a different lender.

Regarding Felix’s hardship, the lender said they had frozen Felix’s account a couple of times when they knew he was struggling to make repayments. The lender said they encouraged Felix to submit a hardship application, but he never completed one.

Overall, the lender said they accepted they had fallen below their usual standards for responsible lending. To settle Felix’s complaint, the lender proposed writing off the interest and fees on his loan, reducing it $3,500, which was the balance of the principal left to be repaid. The lender said they were open to considering a repayment plan that was affordable for Felix.

 

Review

We reviewed all the documents relevant to the loan, and the lender’s proposed resolution.

We told Felix and the budget adviser the lender’s offer was reasonable, because the usual remedy for irresponsible lending was for the lender to write off all the interest and fees on the loan, leaving the borrower to repay the principal amount. Even though the loan should not have been approved in the first place, Felix has the benefit of the funds and car, so should be responsible for paying back the principal amount.

As for Felix’s hardship application, we thought the lender was entitled to request further paperwork from Felix to support his application. The lender did not have to keep Felix’s account frozen unless they were satisfied Felix was taking steps to prepare a repayment plan and provide the requested documentation, and it was not clear he was doing so.

 

Resolution

Felix agreed to accept the lender’s offer, and we helped Felix and the lender to work out an acceptable repayment plan.

 

Insights for participants

When participants put forward a reasonable settlement offer at the outset, it can help progress a fast and efficient resolution. This usually leaves a complainant feeling happier with the outcome.

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