Responsible and Irresponsible Lending: What’s the Difference?

January 9, 2023 • Chris Bardsley

If you have been, or are about to start looking for a loan, one of the terms you might have seen is ‘responsible lending’, but what does it mean?

Here, we’ll explore responsible and irresponsible lending, what they both mean, the differences between the two, and the telltale signs of whether a lender is responsible or not.

What is responsible lending?

If a credit company is deemed to be a responsible lender, it acts in the best interests of its customers.

A lender would be considered responsible if they do the following things:

  1. Ensure affordability

  2. Act transparently

  3. Reasonably evaluate a consumer’s financial situation before entering into a credit agreement

  4. Support them if they have trouble repaying their loan

Essentially, it’s a case of lenders doing the right things for their customers.

What is irresponsible lending?

Irresponsible, or unaffordable lending, could include:

  1. The lender not treating the customer fairly, especially in instances where they can’t repay their loan

  2. Offering unaffordable levels of interest

  3. Proposing an unrealistic repayment schedule

  4. Not completing reasonable or proportionate checks

Tips on how to spot an irresponsible lender

Now you know what irresponsible lending is, it should be much easier to spot it. So, if you’re applying for credit, make sure the lender you’re considering ticks the right boxes and has taken the bigger picture of your finances into account.

If a lender is offering quick, hassle-free credit or loans, this could be a cause for concern. Remember, if something feels too good to be true, it usually is.

Likewise, lenders should not profit from tying their customers down to crippling long-term debt. So, if you notice a lender offering a particularly long repayment schedule with high rates of interest you may want to look elsewhere.

In the case you’re taking out a loan with a guarantor, responsible lenders will check whether the loan is affordable to you, as the borrower, and the guarantor. So, make sure you speak to the guarantor about their experience too - has the lender got in touch with them and, if so, what questions did they ask?

You should consider whether the loan company you’re looking at is regulated by the Financial Conduct Authority (FCA) too.

If the company is not regulated, you may not be covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS). Before taking out a loan or other financial service, you can check whether a company is regulated by the FCA by searching their database - find the Financial Services Register here.

When considering who to borrow from, it is crucial you ensure you’re borrowing from a reputable and legal company. When times are hard, it can be difficult to turn to other means of securing finances, i.e. through loan sharks.

A loan shark is an illegal money lender who will charge extremely high-interest rates and use intimidation tactics to force borrowers to repay. To learn more about loan sharks, including how they might act and operate, explore our ‘Loan Sharks: what are they and how to avoid them’ blog.

What can you do if you feel like a lender has acted irresponsibly?

If you feel like a lender has acted irresponsibly to you, you must first complain to the lender. If you’re not happy with the response, you can contact the Financial Ombudsman Service (FOS), which will independently review the case and decide whether the lender has acted fair and reasonably.

If you agree with the decision of the FOS, it will be considered legally binding. However, if you don’t accept the decision, the last resort would be to take the matter to court.

In cases where you accept the FOS’s decision, it will be considered legally binding. However, if the claimant doesn’t accept the decision, the last resort would be to take the matter to court.

Where the Ombudsman has decided in the claimant’s favour, they will tell the lender how to put things right. This will include putting the claimant back in the position they would have been in if things hadn’t gone wrong and could mean the lender has to pay compensation.

To lodge a complaint against a lender, you should contact the FOS within six months of receiving a final response from the lending firm. Visit the Financial Ombudsman Service's website for more information and to complain about a lender.

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If you’re looking for an affordable alternative to mainstream lenders, or have been rejected for credit before then we’re here to help. Fair for You was established to make credit accessible for everyone, regardless of their financial circumstances. We’re FCA-approved too. Explore the four simple steps to how Fair for You works here.

*Please note we’ve used links to external websites. Although we make every effort to ensure these links are accurate, up-to-date and relevant, Fair for You Enterprise CIC cannot take responsibility for pages maintained by external providers. Views expressed on external sites we link to are not necessarily those of Fair for You Enterprise CIC. If you come across any external links that don’t work, we would be grateful if you could report them to the web content team.

The content of this blog does not constitute personal financial advice, and the views expressed in it are those of the contributor or author, which may not necessarily represent or reflect the views expressed by Fair for You Enterprise CIC.

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