Unaffordable Debt- Lender Writes Off Balance Of Loan

Financial Ombudsman service, Financial Services Complaints Limited (FSCL), has welcomed the decision of a lender to write off the balance of an unaffordable loan after a consumer found themselves unable to service their debt.

As the case note explains, in December 2021, Samantha took a $52,000 loan for a new car, including $6,600 for “add- on” insurance policies, including payment protection and mechanical breakdown.

Within four months of taking out a car loan loan Samantha was struggling financially. She sought help from a financial mentor who argued that the lending was unaffordable in the first place, and, had the lender done a proper affordability assessment, they would have found that she was not able to cover the loan repayments on tip of her existing commitments.

Samantha brought the complaint to FSCL, and the lender offered to settle the complaint by refunding all interest and fees Samantha had paid, about $3,800. The lender would then sell the car and write off the balance of the loan.

Samantha’s financial mentor said a fairer outcome would be for all her loan payments to be refunded.

“Our review focused on the reasonableness of the lender’s offer,” says Ms Taylor adding that the lender’s offer to refund interest and fees, rather than everything Samantha had paid was fair.

“This was firstly because refunding the interest and fees was consistent with the remedy set out in the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Secondly, Samantha had benefitted from the loan by having the use of the car for a period of time. This meant we thought it was reasonable for the lender to retain the loan principal payments she had made.”

Further, the lender had offered to write off the balance of the loan, after selling the car.

“All parties agreed that Samantha’s car would sell for much less than the amount she still owed. This would have left a shortfall that Samantha would have been responsible for repaying,” explains Ms Taylor.

“This case is an example of a lender making a fair offer to resolve a complaint. The lender’s decision to write off the remaining balance of the loan is not something we would always expect to see but may be the reasonable and pragmatic thing to do when there is little chance of recovering a shortfall from a borrower or where, in the particular circumstances of the case, it is the right thing to do.”

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