Couple shocked car loan repayment 'waiver' did not cover job loss

Tuesday, 18 January 2022

Repayment waivers sold with some car loans are extremely poor value for money, with the Commerce Commission calculating the probability of a customer’s claim being approved is just 2 per cent.

Loan repayment “waivers” on two car loans proved to be of no value for a couple who fell into financial hardship, an investigation by the Financial Services Complaints service found.

Repayment waivers are a form of quasi-insurance which excuses borrowers from making repayments when they are unable to work. But they were investigated by the Commerce Commission last year after complaints from financial mentors.

The commission found that each year about 40,000 repayment waivers were sold by lenders to borrowers. While they paid combined premiums of $35 million, they were such poor value-for-money that loan repayments of just $4m a year were waived.

Susan Taylor, chief executive of Financial Services Complaints (FSCL) warned consumers considering paying for a repayment waiver to ask themselves if it was fit for purpose, and to check they understood the circumstances in which they could make a claim.

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Susan Taylor, chief executive of Financial Services Complaints, says consumers need to realise that loan repayment waivers are generally added to a borrower’s loan, resulting in them paying higher interest charges.

Taylor said the couple complained after one of them stopped work following an employment dispute, but was shocked to find he was not included in the repayment waivers, despite being jointly responsible for repayments, and being the higher earner.

The borrower left his job after mediation failed.

The man complained to FSCL that the waivers should have covered him, and his job loss.

He claimed the waivers were not fit for purpose, and had not been properly explained by the lender.

Taylor found no evidence to support those claims, and no evidence explaining why only one of the two borrowers was covered.

She found no evidence that the lender was at fault.

“Unfortunately, in this case, even if the waivers had covered (him), they would not have been applicable to his job loss anyway, as the waivers did not cover job resignations,” she said.

The lender offered to set up an affordable repayment plan for the borrowers, she said.

This graph was created by the Commerce Commission, and published in its November report on car financing 'add-ons'. It shows the difference between the amount 'waived' by lenders in payments and the amount paid by consumers in retail premiums for repayment waivers in each year.

“If an affordable repayment plan could be reached, the lender would reverse default interest it had charged on the loan,” she said.

The complaint pre-dated new lending regulations which require lenders to keep accurate records of decision-making, Taylor said.

“Now, with the recent law changes, they would need to have records that show the reason for why the repayment waiver only covered one of the two of them.”

Taylor did not know if that would have changed the result of the complaint, but “where there is an absence of record-keeping, we may give more weight to the recollection of the borrower”.

Consumers needed to take care to understand what they were buying, she said.

They also needed to realise that loan repayment waivers were generally paid for by the lender adding the one-off premium to a borrower’s loan, resulting in them paying higher interest charges, she said.

Under FSCL rules the lender’s identity is kept secret.

Taylor expected the Commerce Commission to continue to investigate repayment waivers.

The commission identified five lenders selling repayment waivers, Auto Finance Direct, Go Car Finance, Motor Trade Finance, Oxford Finance, and Thorn Group Financial Services.

It found the probability of a waiver customer claiming and having that claim approved was just 2 per cent.

“I believe it is on their work radar this year to take a closer look at some of these repayment waivers,” Taylor said.

In its November report on car financing “add-ons”, which include repayment waivers, the commission said its research would inform its future enforcement work.