Glossary term
Responsible Lending
Subject: Compliance and Regulation, Conduct and Consumer Protection
Responsible lending is the practice, often a legal duty, of lending only after checking that the borrower can repay without undue hardship, and of explaining the terms and risks clearly.
Explanation
Before granting credit, the lender gathers income, spending and existing debt information and tests whether repayments are affordable, including if rates rise or income falls. It explains the cost, fees, penalties and consequences of missed payments in plain language, and avoids pushing larger loans than needed. After lending, it treats customers in difficulty with forbearance, such as payment holidays or restructuring, before it moves to collections. Rules differ by country: affordability tests are required for consumer credit in the UK, the EU and Australia, and many regulators set limits on debt to income. Some also restrict high-cost products such as payday loans. Weak practice leads to over-indebtedness, defaults, redress claims and fines. Skipping the affordability check hurts twice: customers fall into arrears, and the lender's own loan book carries more bad debt.
Example
A consumer finance company receives an application for a 20,000 loan from a customer earning 2,500 a month with existing repayments of 1,200. The affordability check, using verified bank statements and an allowance for higher living costs, shows the new instalment would leave too little money. The company offers a smaller loan over a longer term instead and explains the total cost.
Not to be confused with
- Fair Lending
- Fair lending is about non-discrimination between applicants; responsible lending is about whether credit suits and is affordable for each borrower.