$920 Fridge Leads To $10,000 Debt

For money month this year, the Insurance & Financial Services Ombudsman Scheme (IFSO Scheme) is highlighting the issue of unsuitable lending, where consumers are given higher loans than they need.

In a recent case investigated by the IFSO Scheme, a woman was given a credit card to purchase a fridge, and ended up deeply in debt because the lending she was given was unsuitable.

Linh* needed a new fridge, so went into a household goods shop to buy one. She found a fridge that cost $920, and the shop offered her a credit card to purchase it. The credit card had an available balance of $6,000.

When she got the credit card, Linh bought other things with it, and then found herself struggling to keep up with the repayments.

The credit card provider recommended she take out a personal loan to pay off the credit card, saying it would be more cost-effective for her. Linh agreed to this, and took out a loan with a balance of $6,378.75.

Linh had to resign from her job due to medical issues, which meant she continued to struggle financially, and she did not use the loan to pay off the credit card. She contacted a financial mentor for help, who made a complaint to the IFSO Scheme on her behalf.

The financial mentor said that the credit card had led Linh into a spiral of debt that she was struggling to deal with. They said Linh had only wanted a hire purchase agreement to buy the fridge, and she “neither asked for, nor wanted, a credit card with a $6,000 limit.” They said the addition of the personal loan meant Linh had a debt of over $10,000.

Karen Stevens, Insurance & Financial Services Ombudsman, says this is a common issue.

“Consumers are sometimes encouraged to arrange credit that is not suited to their requirements and objectives. If someone walks into a shop wanting a hire purchase agreement for a particular item, like a fridge, they shouldn’t be offered a credit card with a higher credit limit,” she says.

“Under the Credit Contracts and Consumer Finance Act 2003 (CCCFA), lenders are required by law to make sure a loan is suitable for the consumer’s requirements and objectives, and will not put them into a position where the borrowing could cause substantial hardship. Lenders need to make the appropriate inquiries of the consumer before offering the loan and provide them with sufficient information so they can make an informed decision,” she says.

“If a lender has failed to do this, they will be required to refund the consumer the interest and fees under the CCCFA,” says Stevens.

Following discussions with the IFSO Scheme case manager, the credit provider offered to refund Linh the interest and fees on both the credit card and the personal loan. Linh was only required to pay off the principal on both accounts. Linh accepted this offer, and said she could afford to repay about $20 per week to each account, which the credit provider accepted.

“This meant Linh was no longer struggling with an out-of-control debt, which was a good outcome,” says Stevens.

Stevens says that if consumers think they’ve been given an unsuitable loan, they should first make a complaint to their lender so that a review of the suitability assessment takes place. Then, if they are unhappy with the response, they can ask the IFSO Scheme to investigate heir complaint, for free.

“Money month is all about taking charge of your money and tackling your debt. We’d like to remind consumers that we’re here to help if they have problems with a lender, and that it’s okay to make a complaint if they think something’s not right,” she says.

The IFSO Scheme resolves complaints about insurance and financial services, and is independent, fair, and free for consumers.

*Name has been changed.

© Scoop Media