Summary
Providing loans and credit without adequately assessing someone’s affordability is referred to as irresponsible lending. In order to lend responsibly, a creditor must always be certain that you can repay the debt in its entirety and punctually, without the need to take on additional borrowing.
Overview
While most lenders will have your best interests at heart, others might approve you for credit without checking if you can afford it first. This is known as irresponsible lending.
If, like thousands of others, you have borrowed more than you can afford to repay and are struggling with debt as a result, you may be able to make a complaint to the creditor or the Financial Ombudsman Service (FOS).
This guide will answer your questions about irresponsible lending, including what irresponsible lending is, how to know if you’re a victim of irresponsible lending, what to do if you’re a victim of irresponsible lending, and what an affordability check is.
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What is responsible lending?
When you apply for credit products, such as payday loans, a lender should only accept your application if they believe you can realistically afford to repay the money. This is known as responsible lending.
For example, before agreeing to give you a loan, a lender should do the following:
- Ensure you can afford to make the repayments
- Make a reasonable assessment of your financial situation
- Transparently explain the terms of the arrangement
- Offer support if you get into financial difficulty and can’t afford to make the repayments
Put simply, a lender should never approve you for a loan if they know it may lead to financial difficulties down the line.
While most loan companies will act fairly and never offer you a financial product they know you can’t afford, other lenders have been known to act irresponsibly if it means they will benefit from higher fees or interest rates when you can’t pay.
What is irresponsible lending?
When a lender lets you enter into a credit agreement without checking you can afford to repay it or knowing that you can’t afford to repay it, it is known as irresponsible lending. It can also be called unaffordable lending or predatory lending.
Similarly, if your credit limit on a catalogue or credit card was increased until it became unaffordable, this is also considered irresponsible lending.
This can drive you further into debt and leave you with missed payment fees and higher interest rates. It may also lead to you defaulting on your payments which can result in further legal action, such as a wage arrestment being issued or debt collectors being sent to your home to take your belongings.
However, under the Consumer Credit Act 2006, borrowers can challenge credit agreements that they believe could lead to an unfair relationship with the lender. This allows victims of irresponsible lending to take court action against the lenders that took advantage of their desperate financial situation.
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What is an affordability check?
Before your lender approves you for a loan, they should carry out something known as an affordability check. This is essentially a test to confirm you can afford to make repayments on the amount you have borrowed.
It compares your monthly income (including salary, benefits, and bank statements) against your monthly outgoings (including bills, expenses, and car finance) to determine if you can afford another monthly payment. If you have enough money left over for a loan, it will determine how much you can realistically afford to repay.
When a lender carries out an affordability check, they will analyse your:
- Income
- Credit score
- Existing loans
- Current debt level
Most lenders also have affability calculators on their websites so you can check if you’re likely to be approved before you apply. This can give you a good idea of how much you need to be able to make your monthly loan repayments.
How do I know if I’m a victim of irresponsible lending?
As a borrower, it can be difficult to know whether a lender is looking out for you or taking advantage of you. But when it comes to irresponsible lending, there are a few warning signs to look for:
Excessive fees
Irresponsible lenders will often downplay excessive fees but if you think something isn’t right, it probably isn’t. While typical fees range from 0% to 5% of the total loan amount, you should be wary of anything above 5%.
Unnecessary extras
If your lender is trying to push unnecessary extras or hidden fees on you that they know you don’t need, this can be a sign of irresponsible lending.
Balloon payments
When you are approved for a credit agreement, always look at your repayments for the entire term. If your monthly payments are low, it may be because your lender expects you to make a substantial payment at the end that they know you can’t afford.
Before approving you for a loan, your lender should have also confirmed your affordability by checking that you can repay the money:
- In full
- On time
- Without having to take out more credit
- Without ending up in financial hardship
- Without falling behind on other financial commitments
How can I challenge irresponsible lending?
If you believe you are a victim of irresponsible lending, you may be able to make a complaint against the loan company that let you borrow the money.
You shouldn’t make a complaint directly against the debt collector or debt collection agency chasing you for the debt as they weren’t the ones that failed to carry out the appropriate checks before lending you the money in the first place.
While there’s no guarantee that they will admit to irresponsible lending, they may allow you to repay a reduced portion of the total debt you owe. In rare cases, they may even issue you a refund, remove all the interest, or write off the debt completely.
However, if you have complained to your creditor and gotten nowhere, you can then make an irresponsible lending claim to the FOS. It doesn’t have the power to issue fines against loan companies but it can act as an intermediary to settle disputes between borrowers and lenders and award compensation.
The Financial Conduct Authority (FCA) also has a set of guidelines that outlines how companies should act when assessing credit agreements known as the Consumer Credit Sourcebook (CONC).
