Responsible lending is something which is promoted by the Financial Conduct Authority (FCA). Finance companies have an obligation to adopt a responsible lending policy into their corporate culture.
What is responsible lending?
In a nutshell, responsible lending is to act in the customer’s best interests. This includes ensuring the repayments are affordable, being transparent regarding the terms and conditions of the agreements and supporting the customer if they fall into difficulty with the repayments.
Assessing an applicants creditworthiness
Before entering into a loan agreement, there are several creditworthiness assessments that a lending must undertake.
The lender must consider whether the commitment that they are entering could impact the customer’s financial situation. They must also consider the customer’s ability to make repayments in line with the loan agreements.
To assess this, the lender can use several different methods. Firstly, they can collect data from the customer during the application process. This will include:
- The financial position of the applicant – This could encompass their current employment status, they marital status, living arrangements and much more. Gaining these details will allow the lender to paint a picture of the customer’s financial position.
- The applicant’s credit history – Obtaining the credit record of the applicant will allow the lender to assess their past repayment ability and make predictions regarding their future repayment habits.
- The applicant’s current credit commitments – Some form of affordability check will be required to ensure that the applicant can comfortably meet the loan repayments alongside all current credit commitments.
- Any known changes in circumstances – It is important for lender’s to ask whether the applicant is aware of any changes that could affect their repayment ability. This could include being made redundant, the imminent birth of a child or a large upcoming financial commitment.
- The vulnerability of the applicant – It is important for lenders to consider whether the applicant has any limitations that could affect their ability to repay the loan.
The loan purpose
The lender should also pay attention to the purpose of the loan. Is the customer planning to use the loan responsibly? Worthy purposes of a loan may include the purchase of a new car, home improvements or debt consolidation.
Responsible lending in guarantor loans
In the case of guarantor loans, the lender will also be obliged to carry out checks on the guarantor, as they are essentially the second line of defence for the loan repayments. The lender must ensure that the loan would not negatively impact the guarantor’s finances if they were required to pay.
In the case of business loans, it may be reasonable for the lender to request the applicant’s business plan. After all, this is essentially going to be the catalyst in ensuring the applicant can meet the repayments.
As an applicant, it may sometimes be disheartening or frustrating to be declined for credit. However, it’s important to remember that a company following responsible lending has your best interests at heart.« Back to Glossary Index