The lending responsibility of long- and short-term loans is important for both lenders and borrowers for varying reasons and both have different responsibilities.
What is Responsible Lending?
Responsible lending is to act in a customer’s best interests, ensuring affordability, transparency of terms and conditions and supporting a borrower if they experience repayment difficulties. Lenders have a responsibility to make sure borrowers understand the details of loan and carry out thorough checks on any borrowers, so they can be confident that what customers will receive will be suitable for their circumstances.
A lenders responsibility is extended from adhering to financial regulations to providing quality loan products and services with exceptional customer service to credit worthy borrowers. A borrower requires support from lenders during the terms of their loans to ensure the loan purpose, terms and repayment dates are met. Lenders are required to check the following:
- Carry out Credit Checks
- Ensure borrowers can afford the loan repayments
- Provide compliant loan terms and conditions
- Give borrowers clear information regarding APR
- Give borrowers enough time to decided on loan agreement terms
- Keep appropriate financial records
- Deliver quality borrower support and customer service
It is worth noting that borrowers with poor credit ratings, who can afford loan repayments but may otherwise be turned down for credit, have the option for a secured loan with a guarantor who stands as security for their loan repayments.
As a lender we are required to adhere to the Lending Code, giving customers clear information about long- or short-term lending so they have enough time to consider the loans terms and conditions and APR before making an overall financial decision to proceed with your loan application. It is a legal requirement to keep a record of all client accounts, loans and financial transactions.
Once a loan is agreed, lenders have a responsibility to support borrowers during the duration of their loan. Lenders follow codes of practice in this regard, particularly supporting borrowers with a history of mental illness and debt
Along with lenders, borrowers have a responsibility when applying and repaying loans, these include:
- Provide honest information
- Improve credit worthiness by meeting bill payments and loan repayments
- Seek further clarity from a lender where terms and conditions and APR may not be understood
- Take the time to consider the loan agreement contract and affordability of repayments
- Contact the lender in timely fashion if changes in circumstances impact ability to meet loan repayments
Short term loans have a high APR and interest rates are an option for individuals seeking an emergency sum of money to cover monthly expenses before receipt of wages or salary, opting for affordable alternatives instead of allowing costly emergency loans to roll over and further impact credit worthiness is a responsible choice.
Where credit worthiness is an issue, borrowers may wish to improve their financial circumstances through engaging family or friends in financial help or opting for a guaranteed loan instead. Seeking professional advice about responsible borrowing and debt clearance helps borrowers to develop healthy credit history and financial status.
The Financial Conduct Authority’s Rules on Responsible Lending
The FCA’s guidance on a customer’s ability to pay and responsible lending, states a firm must be able to show that the customer’s ability to repay was taken into account. In addition, lenders must take account of the customer’s actual or reasonably anticipated income, in reaching a decision on whether to enter into a mortgage contract.
Originally published in the OFT in 2010, the FCA’s rules on responsible lending. Before entering into a credit agreement with a customer, a lender must assess the customer’s creditworthiness – not just the risk to itself in providing the credit to the customer. The assessment must include considering the customers financial wellbeing – this is the potential for the commitments under the credit agreement to have an adverse impact on the customers financial situation.
An assessment is intended to determine the customers ability to make repayments as they fall due over the life of a credit agreement. It has to be based on sufficient information, which may be obtained from the customer, where appropriate and from a credit reference agency to establish the customer’s credit history.