Steve and Laura complain that their secured loan was unaffordable

Consumer Credit Unaffordable lending

Steve and Laura felt their secured loan was unaffordable and proper checks had not been carried out by the lender, when they struggled to make repayments. They complained to us about the lender's response.

What happened

Steve and Laura took out a £10,000 loan. It was needed to clear some unsecured debts, mortgage arrears and to fund some house repairs. The lender approved the loan with an interest rate of 35%. The loan was secured by a charge on Steve and Laura’s house.

After a short time, Steve and Laura struggled to make repayments. In retrospect, they felt the loan had been unaffordable from the start and proper checks had not been carried out by the lender. They said the lender hadn’t got a valuation of their property or checked their outgoings before lending. Steve also felt the lender should have been alerted to a problem by their poor credit score, existing debts, and past and current arrears. Steve said there were also gambling payments on his bank statements and that should have indicated a gambling addiction.

The lender said it did not feel it had lent irresponsibly, so Steve and Laura asked us to take a look.

What we said

We were satisfied that Steve and Laura were in a difficult financial position when they applied for the loan, as they had explained to the lender when they applied for the loan. We thought about the regulations that applied to Steve and Laura’s loan when it was taken out. Those regulations said lenders must consider sufficient information to make a reasonable assessment on whether the loan would have an adverse impact on a customer’s financial situation. We did not think their checks were sufficient in verifying Steve and Laura’s expenditure.

The lender said it relied on Steve and Laura’s bank statements and declarations of their income and expenditure. We asked for a copy of the statements and found they were incomplete. Some pages of the statements had been missing  and the lender had not asked for the missing pages. Had the lender asked for complete statements it would have found further debts and evidence of a high volume of expenditure on gambling. The lender also had not asked for credit reports, which showed Steve and Laura’s pattern of borrowing was unsustainable.

Through our investigation, we learned that Steve and Laura had over £26,000 in unsecured loans, and the new loan added to that by some way with its high interest rate and fees. They quickly fell into arrears, which we thought would have been foreseeable had sufficient checks been carried out. Whilst the lender took what Steve and Laura said in good faith, we would expect a high level of scrutiny where a loan will be secured on a customer’s home. This is especially important where there’s debt consolidation and signs of wider financial difficulties, as was the case here.

Overall, we said if the lender had carried out sufficient checks, it would have known further borrowing was neither affordable nor sustainable, especially given the pattern of spending on gambling. To settle the complaint, we told the lender to remove all interest and charges that had previously been applied to the loan and to not apply any interest in future. They should treat all repayments Steve and Laura had already made towards reducing the capital amount of the loan. We also asked the lender to remove any negative information about the loan from Steve and Laura’s credit file.