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A woman was approved for a car loan that she couldn’t afford. Photo / 123RF
A solo mum with three children was forced to forgo food in order to cover loan repayments for a car after her lender had under-estimated the woman’s living costs.
The case was recently highlighted by dispute resolution service, Financial Services Complaints Limited (FSCL), as a stark reminder of lenders’ responsibilities to ensure loan applications are affordable.
The woman, only referred to as Sarah, was granted her loan application in 2019 to borrow $12,550 to buy a new car, with a weekly repayment of $120.
However, the mum-of-three had to turn to borrowing money from friends and family to feed and clothe her children, so she could pay the car loan, which she was dependent on to take her children to school and the doctor.
It was when Sarah went to see a financial mentor earlier this year that an assessment showed her budget was about $100 a week in deficit.
The financial mentor asked the lender for more information about the loan application as a please explain.
The lender said that the lending was affordable and there had been no issue, as Sarah had always paid her instalments.
However, the financial mentor was not satisfied with this and complained to FSCL on Sarah’s behalf, claiming the lender had not met their responsible lending obligations in under-estimating the woman’s living costs.
The financial mentor explained that Sarah had only managed to make her loan repayments by sacrificing other expenses, putting her and her family under considerable stress.
The FSCL’s investigation found that the biggest discrepancy in the affordability assessment for the loan was the amount the lender had allowed for food and household expenses each week – $170 a week, compared with the financial mentor allowing $220 a week.
The lender argued that it relied on the Statistics New Zealand Home Economics Survey, which showed that an adult with three children, living in Sarah’s region, with the same income as Sarah, would spend $260 a week on food. This figure was then discounted 65 per cent by the lender to reflect the fact that Sarah earned 65 per cent of the national average income.
FSCL chief executive Susan Taylor explained “while we agree that those on higher incomes will likely spend more on food, it was our view that the Statistics New Zealand data had already taken this into consideration and that the lender had made a mistake when they applied the further 65 per cent discount.”
“Using the undiscounted amount from the Statistics New Zealand data, Sarah could be expected to spend $260 a week on food and household expenses, more than both her financial mentor and the lender calculated,” Taylor said.
The FSCL found that the lender had made a mistake when calculating whether Sarah could afford the loan and had breached their responsible lending obligations by failing to satisfy themselves that Sarah could repay the loan without suffering substantial hardship.
The lender was required to refund all the interest and charges added to the loan as the remedy for the breach, amounting to about $6,500.
Once refunded, Sarah’s outstanding loan balance was fully repaid, and she received a refund of about $500.
“If a lender makes a mistake in calculating either income or expenses, it may lead to a breach of the Credit Contracts and Consumer Finance Act (CCCFA),” Taylor warned.