Responsible Lending refers to how lenders provide their loan products in a way that is transparent, fair and in the interest of the customer. The practice of Responsible Lending is something that we regularly mention on The Lenders List because we only want to feature loan companies that are responsible.
The Financial Conduct Authority (FCA) began regulating the payday loan industry on 1st April 2014, taking over from The Office of Fair Trading. In the FCA guide on Responsible Lending, the regulator explains what is expected of payday lenders in order to be compliant to operate in the industry. Below we highlight some of the key features of this practice:
Responsible lenders should clearly explain the loan products that they are offering. A compliant lender will clearly state the rate of APR on their website and be clear about the repayment examples. A lot of lenders provide a loan calculator on their websites and this is a useful way for applicants to get an idea of how much they can borrow and repay.
The FCA guidance explains how all financial promotions should be clear, fair and not misleading. There are many payday loan brokers in the industry who do not provide the customer with the loan, they simply recommend other lenders sometimes taking a fee from the applicant. Transparency is important so that the borrower knows exactly what they are getting when they fill in an application page. For this reason, The Lenders List only features direct payday lenders and we do not recommend brokers.
In this example below with Mr Lender, one of our featured lenders, you can use the calculator to see exactly how much you are going to repay and the APR is clearly visible. There is also more information about Responsible Lending included on their homepage:
Lenders Carrying Out Appropriate Checks
Several lenders have come under criticism recently for granting loans without running adequate checks. As part of the Responsible Lending procedure, lenders must run something called affordability checks – this refers to the measures that lenders take to ensure that a customer can afford to repay their loan. This can be achieved by confirming their salary by calling their work to check that they are employed or by requesting a copy of their payslip, p60 or bank statement.
Whilst not all payday lenders run credit checks, those lenders that are indeed taking time to run appropriate credit checks are taking the initiative to understand a customer’s finances better so they can base their loan decision on this.
The FCA guidance wants to encourage payday lenders to collect the repayments from their customers in a compliant and responsible way too. There are certain things like ensuring that a customer’s account is not attempted more than twice a day for collection on the day of repayment. This is so that if the customer cannot afford to repay, the lender can get in touch before the chance that money might be able and then collected without notice. There are other practices such as limiting to two rollover or extensions on any given loan. This is to help prevent a customer entering a debt spiral by topping up their loan again and again.
If a customer is unable to repay their loan, responsible lending encourages the loan company to offer forbearance and be willing to help the customer by freezing repayments and arranging more flexible repayment plans depending on their circumstances.
Above all, to emphasize the risk of high-cost short-term loans, lenders must exhibit the risk and warning labels on their websites. Therefore, if a customer is having financial troubles as a result of a payday loan or is looking for a payday loan because of financial difficulty, they can contact MoneyAdviceService below.