Unaffordable and unsuitable lending

Lenders need to check that any lending they provide is suitable and affordable for you. This is an important obligation to protect you from products that are not appropriate or cause financial harm.

Unaffordable lending means when your loan is arranged your repayments are too high for your circumstances, and you can’t make the payments without suffering substantial hardship.

Unsuitable lending means when your loan is arranged it’s not suitable for your particular needs. For example, the credit limit provided on your credit card is higher than what you need.

It’s important that when consumers take on debt, they are able to repay it. Consumers shouldn’t be sold loan products that are not suited to their needs and objectives.

Legislation protects consumers by setting out clear obligations for lenders before they arrange a loan contract.

Understanding a lender’s obligations can help consumers identify issues and escalate them for review, if needed.

Jake’s uncertain overtime

Jake’s* financial mentor complained because she believed his loan was not affordable when it was arranged two years earlier. The lender had decided the loan was affordable based on Jake working 33 hours overtime a fortnight.

The IFSO Scheme found that the lender had not met its obligations to make enough inquiries about the overtime and if Jake could make the loan repayments without suffering financial hardship. The IFSO Scheme said the lender needed to refund all interest and fees Jake had paid on the loan. Jake didn’t need to pay any more interest, but he did need to repay the principal debt he owed.

Mrs Clayton’s personal loan pain

Mrs Clayton* was sole caregiver of her 3 grandchildren and received a government benefit. She had been provided 27 personal loans by her lender since 2002. Mrs Clayton’s representative made a complaint to the IFSO Scheme about the most recent loan because he felt it was unaffordable.

The lender had relied on boarder income of $200 a week to decide the lending was affordable for Mrs Clayton. However, in previous applications, Mrs Clayton had recorded inconsistent and considerably lower boarder income.

The IFSO Scheme found the lender had made enough inquiries into the boarder income, but it found the lender had relied on a budget that missed important information. The IFSO Scheme said the lender should make a compensation payment to Mrs Clayton to reduce the debt and set out how loan would be repaid, based on what was affordable in Mrs Clayton’s circumstances.

*Names have been changed

See more loans and credit case studies

  1. How lenders assess affordability and suitability

    Lenders need to ask for information from you to make sure you can make your loan repayments without suffering substantial hardship. They also need to ask for information to make sure the product is suitable for your needs.

    To do this, a lender must complete affordability and suitability assessments when you apply for a loan.

  2. Important information about affordability assessments

    Lenders need to conduct an affordability assessment:

    • Before entering into a loan agreement with you; and
    • If there are changes to the loan that will increase the credit limit

    An affordability assessment commonly includes:

    • Looking at your income and expenses
    • Asking you about any likely changes in your income
    • Verifying your income and expenses (for example checking bank statements)
    • Making a final assessment to confirm if you can make the loan repayments without suffering substantial hardship
  3. Important information about suitability assessments

    Before entering into a loan agreement with you, the lender needs to ask you questions to understand:

    • The purpose of the loan
    • The amount of money you need to borrow
    • The length of the loan
    • Other relevant information

    The lender must complete a suitability assessment to make sure the loan is suitable for your requirements and objectives. They should keep information to show how they made the assessment.

  4. Remedies may be available if the loan is unaffordable or unsuitable

    If a lender didn’t check the loan was affordable and suitable for you, there may be remedies available under relevant legislation. Generally, this is a refund of interest and fees charged on the loan. You still have to pay off the amount you borrowed.

  5. I think my loan was unaffordable and/or unsuitable – what do I do now?

    You can request a review through your lender’s internal complaints process. If you are unhappy with the complaint response, you can ask the IFSO Scheme to investigate your complaint, for free.

    If you would like the support of a financial mentor to help understand your circumstances, you may wish to contact Moneytalks. Moneytalks is a free service that supports people and whānau to manage their money and obtain the financial support they are entitled to.

    Paraphrased from home page: "We connect people and whānau with their local foodbanks, help them find their way through Work and Income processes and entitlements and support people to manage their money.

  1. You were struggling to make ends meet when you took out the loan

    If you were struggling to make ends meet when you arranged the loan, the loan may not have been affordable for you. You can make a complaint to your lender so a review of the affordability and suitability assessments takes place.

  2. You were given a higher credit limit than you asked for

    If you were given a higher credit limit than you initially asked for, the loan may not have been suitable for you. You can make a complaint to your lender so a review of the affordability and suitability assessments takes place.

  3. You’ve asked your lender for a copy of its assessments and it hasn’t provided them

    A lender should give you a copy of your affordability and suitability assessments, if you ask. The lender should provide it to you within 15 working days. If you think there are problems with the assessments, you can make a complaint to the lender so a review takes place.