Need to know
- In March this year, the Australian Securities and Investments Commission announced it was launching a review into the used car finance sector
- The regulator is currently taking legal action againt Money3 Loans for breaching responsibile lending laws when approving used car loans
- We highlight the case of a cash-strapped woman whose used car was purchased with financing from Money3 but broke down within days
Having a loan quickly approved so you can buy a used car can seem like a good thing, until the vehicle stops working and you have to keep making payments.
It's a widespread problem that's getting worse, especially for people who are struggling financially. In March this year, the Australian Securities and Investments Commission (ASIC) announced it was launching a review into the used car finance sector, with a focus on regional and remote locations, including First Nations communities.
In particular, ASIC will scrutinise adherence to responsible lending laws by seven lenders as well as look at how they handle defaults, disputes and hardship cases.
The action follows a number of cases of used car lenders breaching responsible lending laws, including the recent case of a woman named Emma.
Money was tight in Emma's world, but buying a new used car was necessary to get to her job which started at 3.45am. Her previous vehicle had become chronically unreliable; public transportation wasn't an option; and, at around $60 a pop, an Uber was out of the question.
Now I'm paying for the car, I'm paying for insurance and I'm paying to try and get the car fixed. So I've run out of funds
Money3 client Emma
She paid $16,000 for what looked like a solid automobile at a used car dealer in a Melbourne suburb. This was well beyond her means, but a financial services firm called Money3 agreed to give her a loan.
It soon became clear that Emma's new car had serious problems. "I drove it to work the next day and home, and it was fine. And then I drove to work the next day and it overheated," Emma tells CHOICE. "I called the car dealer and said I need to bring the car back. And they said, no, you have to deal with National Warranty."
This is a separate business that provides extended warranties for cars, tacked on as part of Emma's purchase. She was told by National Warranty to take the ailing vehicle to one of their approved mechanics, where she paid for several small repairs to the radiator.
The car continued to overheat, and Emma was seriously distressed.
"I was crying and sobbing because now I'm paying for the car, I'm paying for insurance and I'm paying to try and get the car fixed. So I've run out of funds."
At this point Emma's then-boyfriend came to the rescue and paid his mechanic $2200 to install a new radiator and cooling system. The car continued to overheat.
Another mechanic Emma consulted told her the car's head gasket had to be replaced. A new one would cost $3000, but the mechanic said what she really needed was a reconditioned engine for $6000. She didn't have the money. Deprived of a working vehicle, Emma lost her job.
She could no longer make her car loan payments, and she started getting emails threatening repossession.
"I was just trying to manage my mental health because everything was crashing down on top of me," Emma says.
Consumer Action Law Centre intervenes
Emma got in touch with the Consumer Action Law Centre (Consumer Action), a Melbourne-based advocacy organisation, where counsellors walked her through her options for resolving the matter. These started with a letter of demand to the car dealer to take the faulty vehicle back. This was met by a howling silence. "Not a phone call, not an email, not anything," Emma says.
The expert advice and support was a godsend, but acting on her own wasn't getting her anywhere.
Consumer Action lawyer Taylah Alanis decided to officially take on the case, which ended up making all the difference. The focus shifted to whether Money3 had properly checked Emma's suitability for the car loan, a requirement for businesses that hold a financial services license. Alanis did her own evaluation of Emma's financial circumstances, and it was clear that Money3's checks were superficial.
The documents clearly show that the loans are unsuitable, but lenders are just not verifying income and expenses
Consumer Action lawyer Taylah Alanis
"It looked like a bit of a tick-the-box exercise. They collected documents, but there was no follow-up to verify or ask additional questions or identify any red flags," Alanis says.
This is typical of many of the irresponsible lending cases Consumer Action has dealt with.
"We often see that lenders will obtain all the documents required, such as bank statements and any other outstanding loans, as well as the borrower's income," Alanis says. "But there can be very obvious red flags in these statements that show that the prospective client is living paycheck to paycheck. The documents clearly show that the loans are unsuitable, but lenders are just not verifying income and expenses."
CHOICE contacted Money3 for comment but didn't receive a reply.
ASIC is currently investigating the used car finance sector, where faulty vehicles often add to the consumer harm.
ASIC case against Money3
Emma's case is not an isolated one. Money3 – which is based in Victoria but offers loans across Australia – is currently involved in legal proceedings brought by ASIC, which has charged the business with failing to undergo thorough lending checks in several instances.
The regulator has alleged that Money3 failed to properly assess whether a number of borrowers – many of them on low incomes or receiving Centrelink payments – could repay the loans they took out for used vehicles, all for the same amount. Many were indigenous Australians.
"The consumer loans we are concerned with showed the purchase price of $8000 for a second-hand vehicle with additional fees and warranty adding another $3,000," ASIC deputy chair Sarah Court said when the case was announced in 2023.
"An $11,000 loan is a substantial sum for a consumer on a low income to repay without having been properly assessed as to whether they could afford to repay it. In some cases the vehicle broke down, leaving the consumer with an unusable car and a loan that they couldn't afford, compounding the detriment."
Far too many consumers are being sold poor quality vehicles on dodgy credit arrangements
ASIC commissioner Alan Kirkland
Closing submissions for the case were heard in March this year, with a judgment expected soon.
In May last year, former CHOICE CEO Alan Kirkland – now an ASIC commissioner – gave a speech focusing on lemon cars and used car financing at the annual Consumer Rights Forum.
Kirkland told the story of a single parent who secured financing on a car with few responsible lending checks. The car soon ground to a halt. The case pointed to a larger story about "far too many consumers who are being sold poor quality vehicles on dodgy credit arrangements – who end up with no car, no way to get around, and ongoing debts", Kirkland said.
The used card dealership sector is rife with consumer abuse, advocates report.
Hotbed of consumer abuse
Consumer Action's Taylah Alanis says the used car dealership sector is a hotbed of consumer abuse.
"We are seeing a lot of egregious behavior by traders, so there's a lot of bad faith around car sales."
But exerting your rights under consumer law after buying a lemon car isn't easy. You generally have to take the case to a state tribunal and present expert reports attesting to the condition of the vehicle. This costs money. And it can take up to two years to even get an initial hearing. Used car dealers appear to be aware of these obstacles.
"These traders aren't interested in informal negotiations and providing a refund," Alanis says.
Meanwhile, people with undriveable vehicles are stuck with the ongoing car payments, including insurance and registration.
We are seeing a lot of egregious behavior by traders, so there's a lot of bad faith around car sales
Consumer Action lawyer Taylah Alanis
In Emma's case, it took around five months for Consumer Acton to convince Money3 to cancel her loan. In the end, her vehicle was carted away via tow truck, and she was reimbursed for loan repayments she'd already made, totalling around $4700. She also received additional compensation for non-financial loss.
ButMoney3 made no apologies. "The reason they settle is to avoid acknowledging any wrongdoing, to avoid admitting that there has been any breach of responsible lending laws," Alanis says.
ASIC says it will publish high-level findings from its review in the second half of this year, followed by a more detailed report.
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