What is irresponsible lending?
Summary
Irresponsible lending is the act of offering loans and credit without properly assessing an individual’s ability to afford them. To ensure responsible lending, creditors must always ensure that you have the capacity to repay the entire debt in a timely manner, without having to resort to further borrowing.
Overview
While the majority of lenders prioritize your best interests, there are some who may grant you credit without properly assessing your ability to afford it. This practice is referred to as irresponsible lending.
If you find yourself in a situation where you have borrowed more than you can reasonably repay and are experiencing financial difficulties as a result, you may have grounds to file a complaint with either the creditor directly or the Financial Ombudsman Service (FOS).
This comprehensive guide aims to address your inquiries regarding irresponsible lending. It covers topics such as defining irresponsible lending, identifying signs of being a victim of irresponsible lending, steps to take if you have fallen victim to irresponsible lending, and the importance of affordability checks.
What is responsible lending?
When you submit an application for credit products, such as payday loans, a responsible lender will only approve your application if they are confident that you can genuinely afford to repay the borrowed amount. This practice is known as responsible lending.
For instance, before granting you a loan, a lender should:
- Verify that you have the means to meet the repayment obligations.
- Conduct a reasonable assessment of your financial circumstances.
- Clearly explain the terms and conditions of the agreement.
- Offer assistance if you encounter financial difficulties and are unable to make the repayments.
In essence, a lender should never approve your loan if they are aware that it could potentially result in financial hardships.
While the majority of loan companies act ethically and avoid providing you with a financial product that they know you cannot afford, there are other lenders who may act irresponsibly, prioritizing their own financial gain by charging higher fees or interest rates, even when they know you are unable to repay.