Sally had taken out a loan and repaid it over 36 months. But she found the repayments difficult to keep up with. She came to us to investigate as she felt it was unaffordable.

What happened

Sally applied for a loan from her lender. The loan was for £5,000 and Sally had to make monthly repayments of around £250 for 36 months. Sally managed to repay the loan but contacted us to complain that it was unaffordable because she struggled to make the payments throughout.

We contacted the lender. They said that they asked Sally for details of her income and her expenditure.Sally said she earned £2,000 a month and had monthly expenses of £500. So she had a monthly disposable income of £1,500. They said they queried why Sally’s living costs were substantially lower than the national average and she said her partner paid all the household living costs..

The lender also said they carried out a check with a credit reference agency which confirmed Sally did have around £2,000 going into her bank account each month for the three months prior to the loan being taken. They also provided us with the results of a credit check which showed that Sally had settled the balances on a number of accounts in the months leading to this application. There were also a couple of defaults from around six months before this application So they felt that this showed that Sally had a strong repayment history and she managed her creditors well.

In the lender’s view, all of this meant that they did enough to establish that the loan was affordable and Sally repaying the loan supported this.

What we said

We took a closer look at the information provided by the lender. We saw that a number of the settled accounts that were referred to were payday loans. And in the months leading up to this loan application Sally had taken loans for up to around £1,000. Sally’s income was only around £1,000 a month – not £2000 - and the reason her bank account might have had £2,000 going in each month was because the payday loans were going into her account too.

We didn’t think that the lender’s checks were reasonable and proportionate. We told the lender that the amount of the monthly repayment, together with the cost and term of the loan and what they saw on Sally’s credit file meant that they needed to get a thorough understanding of her financial circumstances before agreeing to this loan. It wasn’t reasonable to simply accept that Sally had a monthly disposable income of £1,500 when the other evidence the lender had – the significant number of payday loans and the defaults - suggested that this was unlikely to be the case.

We went on to look at what proportionate checks would more likely than not have shown. And we saw that Sally was in a tough financial spot. Pretty much all of her income was going to towards repaying her existing creditors. And there was no reasonable prospect of her being able to make these loan payments and meet her living costs without borrowing further. So we told the lender that we thought they unfairly provided Sally with this loan as proportionate checks would more likely than not have shown it shouldn’t have been given to Sally.

The lender was told to refund all the interest and charges that Sally paid, adding 8% simple interest. We also told them that they needed to remove any adverse information they recorded on Sally’s credit file.