Financial Hardship in NZ: What to Do If You Can't Make a Loan Repayment

Most people wouldn’t think of taking out a loan without the intention of paying it back. Lenders are required to check that borrowers can afford the proposed loan repayments, and borrowers know from the outset that the repayments will work with their budgets. But financial hardship can happen to anyone, and it often happens without any warning.

People may lose their jobs, become ill, or face unexpected expenses that can quickly make loan repayments difficult. The good news, though, is that the sooner you take action in these circumstances, the more options you are likely to have to address them.

Here’s what you need to know about what financial hardship means, what support could be available to you if you’ve hit a tough patch, and what steps you should take before you miss a repayment.

What counts as financial hardship under NZ law?

The Credit Contracts and Consumer Finance Act (CCCFA) puts requirements on lenders when it comes to how they deal with borrowers who are dealing with unexpected hardship. To qualify to make an application for help on these grounds, borrowers need to be in a situation where unexpected changes in their circumstances have made it hard to meet their loan repayments.

This applies to things like illness, job loss, the end of a relationship or the death of a spouse. The hardship could be temporary or ongoing, and each application for relief on hardship grounds is assessed individually under the CCCFA.

You have rights: what the law requires lenders to do

Borrowers have the right to request changes to their loans if they encounter unexpected hardship. Lenders are required to consider all eligible hardship applications in good faith, as part of their responsible lending obligations, which continue through the life of the loan.

There are set timeframes within which they have to process applications and provide their decisions.

It’s important to know, though, that you lose your right to have your hardship application considered if you have been behind on payments for two months or more, you’ve failed to make four or more consecutive debt repayments on their due dates, or you’ve been in default two weeks or more after receiving a repossession warning. That means it’s vital that you take action as soon as you think you might have trouble making repayments.

Here’s how the process might work.

Step 1: Understand your financial position before you contact your lender

A helpful first step may be to review your current financial position to fully understand what the situation is. Has your income changed? How does it compare to your essential expenses? What debts do you have, and what repayments are you required to make? Is the hardship you’re experiencing likely to be temporary or long-term? It’s useful to gather the supporting documents you will need before you approach your lender.

You may also like to think about your bills and debts and rank them in order of priority. Housing costs are generally the most pressing concern for borrowers, because paying the rent or mortgage is important when it comes to providing a home for your family. Essential utilities like power will also be important to avoid disconnection. Secured loans such as car finance may take priority over unsecured debt. Your credit cards and other unsecured loans will still need to be addressed, but they may be further down the list than the essential commitments. You may find that applying for hardship help with these unsecured loans is a way to allow you to maintain payments on the bigger bills while you get back on your feet.

Step 2: Contact your lender as soon as possible

It can’t be overstated how important it is to get in touch with your lender as soon as you see the potential for problems. It’s always easier to ask for help before you have missed repayments. But even if you’ve been taken by surprise and didn’t realise there was an issue until a payment didn’t happen as expected, it’s important to get in touch with your lender as soon as you can.

You’ll need to make your application in writing and explain what’s changed and why you’re experiencing financial hardship. Explain what repayment level you think you could currently manage and ask what hardship assistance or alternative repayment options are available to you. Keep a written record of your communications that you can refer back to if necessary.

What relief options can your lender offer?

There are a few ways that lenders might be able to help.

There are a few ways that lenders might be able to help.

This puts a temporary pause on your repayments for a set period of time. Interest will generally still accrue while you’re not making payments, so you may end up paying back more overall, but this can be a temporary solution if you’re in a period of financial pressure.

Loan term extension

If you think you’re likely to be in a longer period of financial hardship, a loan term extension can be a more lasting solution. If you extend the term of your loan, you take longer to pay it back and make smaller payments each time. Again, this will probably increase the total amount you pay over the life of your loan, so it’s worth making sure you understand the implications of your decision.

Reduced repayments

Your lender may offer you the option of reduced payments for a time. This can be another solution for short-term financial hardship. Sometimes, repayments may resume at a higher level to allow you to still pay off the loan within your original term. In other cases, you may return to your previous repayment level and extend the term of your loan. The options vary between lenders.

A combination 

You may be able to negotiate something that combines a few of these options to suit your individual circumstances.

What happens to your credit score?

Lenders do keep track of which borrowers have made official requests for hardship assistance, and this can mean a financial hardship indicator (FHI) is added to your credit history. However, this is usually preferable to having missed repayments on your credit history or defaulting on your loan. You can check your credit report regularly, at no cost, and if you have any concerns, discuss these with your lender.

What if your hardship application is declined?

While your lender has to consider your request, it does not have to agree to it. Generally, lenders will want to work with you to determine an outcome that works for you. If that’s not possible, though, the lender may decline it. If so, you can ask for the reason to be put in writing, and ask for a review if you think your circumstances haven’t been fully considered. If you can’t resolve it with the lender, you can also ask for help from the lender’s dispute resolution scheme. All financial services providers are required to be a member of a scheme. The scheme won’t necessarily overturn a lender’s decision, but it can check that the process was handled correctly.

You may also be able to seek support and advice on your options from a financial mentor or Citizens Advice Bureau.

Could debt consolidation be the right move?

Depending on your circumstances, you may consider whether debt consolidation is an option. When you consolidate debt, you combine a number of loans into one, meaning you will then usually have only one regular repayment. This can really help if you’re in a situation where you have a number of loans, all going out of your account at different times, and it’s hard to keep up with.

It can be a way to simplify your finances and potentially reduce your overall monthly repayments, if you can access a lower interest rate or you opt for a longer loan term. (Note, as mentioned earlier, a longer loan term may mean you repay more overall.)

It’s often a good idea to compare the total cost of borrowing when you’re deciding whether to consolidate your debt.

Other free support available in New Zealand

There are many options when it comes to seeking advice on your financial situation. Beyond asking a lender for assistance, you could try any of the following:

• MoneyTalks is a free phone line that offers budgeting help and financial mentoring. This could be suitable for people who are wondering what their options might be.
• Online tools such as Sorted’s can help you with things like budget planning. Our loan repayment calculator can show you what repayments would look like on different loan amounts and interest rates.
• Citizens Advice Bureau around the country can also offer independent guidance.
• Your lender’s dispute resolution scheme is also available to help if you haven’t been able to resolve a complaint with the lender directly.
• In some cases, you may be able to make an application for withdrawal from KiwiSaver if you are in serious financial hardship. This is a separate process that is dealt with by your KiwiSaver provider. It’s important to understand the potential impact a withdrawal can have on your investing outcome.
  
  

Understanding your rights and the support that is available to you can help you navigate any financial difficulties you might encounter with more confidence.

Frequently Asked Questions (FAQs)

How long does a hardship application take?

Lenders need to acknowledge receipt of your application within five working days, request more information if it is needed within 10 working days, decide on your application within 20 working days and notify you of the decision in writing.

Does financial hardship affect my credit score? 

It may register on your credit score but will generally have less impact than missed payments or loan defaults.

What happens if my hardship application is declined? 

You may be able to challenge the decision. If that’s not successful, you may need to consider what other options are available to you.

Can I apply for hardship before missing a repayment? 

Yes, this can be the best time to do so.

Is a repayment holiday the same as debt consolidation?

No. A repayment holiday is when you stop making payments for a period of time while you deal with unforeseen financial hardship. Debt consolidation combines a number of loans into one new one. Both can be options if you’re having trouble with your loans, but they work differently, and it’s important to understand the cost and terms of whichever option you choose.

Get in touch with the team at better finance™ today. We’re lending experts, and we’re here to help.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.