A lot of people are putting in complaints about unaffordable payday loans, asking the lenders for refunds of interest on loans that they have repaid and for outstanding balances to be written off. If you have borrowed a lot from a lender, this is usually straightforward – the simple fact that you kept repaying then borrowing again shows that the loans were not affordable for you.
But if you only had a few loans from a lender, the lender may only offer to reduce your balance, not write it all off. This article looks at what the Financial Ombudsman might decide, to help you decide whether to accept the lender’s offer or to take the complaint to the Ombudsman.
Here is a made-up example of Mr X whose take home pay was £1100 a month. In 2012 he had three loans from MoneyForNothing:
In this example:
- the first two loans were low in relation to Mr X’s take home pay but the last loan was larger;
- the first two loans were repaid a few days late;
- the gap between loans 1 and 2 was only a day and loan 3 was taken out the same day loan 2 was repaid.
What the lender offered
Mr X complained to MoneyForNothing. They denied they had done anything wrong but offered to:
- take the interest off the third loan so only £200 remained
- refund the interest on loan 2 and add 8% statutory interest to this (£108 in all)
- use the £108 to reduce the £200 owing on the l;ast defaulted loan.
Is this a reasonable offer?
What would the Ombudsman decide?
The Ombudsman will typically decide that the lender couldn’t have known at the start that the borrower was in trouble – often the first few loans are treated as affordable.
As the first loan was paid late and then the second loan was taken out the next day, the Ombudsman may well decide, like MoneyForNothing, that loan 1 was affordable but 2 and 3 were unaffordable.
MoneyForNothing’s offer of a refund on loan 2 is inline with what the Ombudsman would have suggested.
So the real question is the outstanding balance. The Ombudsman has talked about financial hardship and unaffordable lending and that says:
Common misunderstandings “If the lending was unaffordable, then it should always be written off.”
No. If we decide that lending was unaffordable, we take into account all the facts and circumstances, before deciding what the right outcome is for that case. This includes considering what overall effect the lending had on the consumer’s financial position (both positive and negative).
We sometimes conclude that writing off some or (exceptionally) all of the debt is the fair outcome in a case. But this will normally be where – amongst other things – we are satisfied that the consumer was vulnerable at the time the loan was made, and the lender knew that.
The Ombudsman’s usual decision where there is a balance remaining on an unaffordable loan is that the interest and charges should be removed, leaving just the amount that was borrowed to be repaid. And that is what MoneyForNothing has offered here.
In this made-up case, I think the offer made is reasonable and there is no point in taking it to the Ombudsman.
Other lenders may not have made this offer. Some seem to reject or ignore every complaint – if this case was rejected it certainly is worth taking to the Ombudsman. Others seem more prepared to wipe the whole balance, perhaps thinking that it’s not a lot of money and may be difficult to collect.
If there had been more loans, the refunds from the repaid loans would probably have wiped out the balance and some money would also have been refunded to Mr X.
If there hadn’t been any late payments, or if there had been a much larger gap between loans 1 and 2, the Ombudsman may well have decided that loan 2 was affordable. In this case the balance on loan 3 would be reduced to the amount borrowed, £200.
If Mr X had repaid some of his last loan, this would have been treated as repaying the capital, so the balance would have been reduced further. This is why if you are in a DMP when you make a complaint you may as well carry on making the payments to it – this isn’t going to reduce the refund you get.