In 2019, 19-year-old Wiremu borrowed $11,000 to finance the purchase of his first car.
The lender calculated that Wiremu’s weekly surplus, after his loan repayments, was $43 per week. The lender considered information Wiremu gave about his income and expenses, spending patterns from his bank statements, and benchmarks. Benchmarks are a guide some lenders use to estimate living expenses.
It was later discovered that the lender had missed Wiremu’s bank loan repayments of $11 per week from their assessment. Wiremu had not included this debt in his loan application, but it showed on his bank statements.
In 2020, Wiremu’s car, which was security for the loan, was written off. Tragically, Wiremu’s friend, who was driving the car, died. Wiremu was following behind in another vehicle and witnessed the accident.
The insurer declined Wiremu’s claim for his car because his friend was not a named driver on the policy. Under the policy terms, only Wiremu and named drivers were covered.
After the accident, Wiremu fell into arrears on his loan. The lender approved hardship assistance, putting his account on hold for three months. They also wrote off Wiremu’s loan arrears and default fees he had paid.
Wiremu’s uncle, George, then complained that the loan was not affordable. Wiremu had been left with a debt of $9,300, no car, and no insurance pay-out. He also had other debts. The trauma from the accident and the financial stress he was under had left him suffering from anxiety, panic attacks, and depression.
The lender did not accept that the loan was unaffordable, but they offered to reduce the debt to $8,000 and stop charging interest and fees. Wiremu did not accept the offer and George asked us to review the loan.
George gave many reasons for why he believed the lender should not have approved the loan, including that they:
- had not considered Wiremu’s bank loan repayments or that his costs of living would increase over the five-year term of the loan
- had underestimated the cost of Wiremu’s motor vehicle insurance and utilities
- should have known Wiremu was not capable of budgeting: he had grossly underestimated his living expenses on his loan application.
George also believed the lender should have known that Wiremu did not have ‘true’ full comprehensive motor vehicle cover because only Wiremu and named drivers were covered.
The lender believed the loan was affordable and that they had made a reasonable offer.
The lender acknowledged that they missed the bank loan from their affordability assessment, and that they may have underestimated a few other expenses. They had used a benchmark amount for motor vehicle insurance because they did not know what the premium would be. The loan buffer more than covered these extra amounts and the lender had used generous amounts for other expenses in their assessment.
For insurance, all the lender required was for the secured vehicle to have full comprehensive cover for Wiremu to drive, which it did.
During our investigation, the lender decided to write off Wiremu’s debt in full, on compassionate grounds, which he accepted.
The lender maintained that the loan was affordable, but upon further reflection they realised that Wiremu’s mental health had been greatly affected by what happened to him. The lender had a compassion fund they occasionally use to write off debts when there has been a significant change in the borrower’s circumstances.
This outcome was probably better than what we would have recommended if we had concluded that the loan was not affordable. Our usual approach is to recommend that the lender should reimburse all interest and fees on the loan. The borrower should repay the principal amount borrowed.
Insights for consumers
For vehicle loans, under the terms of the loan agreement, the borrower is usually required to insure the secured vehicle under full comprehensive cover. The lender may ask for proof that the vehicle is insured, but they will probably not review the policy details. It is important that the borrower reads the certificate of insurance and policy wording.
A policy which only covers named drivers may not be suitable for some people. If this type of policy is in place, the insured should disclose all drivers to the insurer and check that they are listed on the certificate of insurance.