What is irresponsible lending?
Irresponsible lending is when a lender gives credit to a borrower without checking if they can afford to pay it back.
When a lender does not check what you can afford, they risk giving you more credit than you need or lending you more money than you can afford to pay back.
Victims of irresponsible lending may need to cut back on essential living costs to keep up with payments to their debt. Or they may fall behind on payments, causing their account to default.
Responsible lenders will make sure that:
- You can afford to pay the debt in full and on time
- You do not have to borrow more money to afford living costs
- You are not at risk of falling behind on your bills because of the debt
- They are not causing you financial hardship
You have the right to complain to your lender if they gave you credit irresponsibly and you are now struggling financially as a result.
What is an affordability check?
An affordability check is what lenders do to make sure you can afford to borrow the amount you are asking for.
They will usually start by asking you about your household budget. They will look at your income, regular bills and your spending needs.
They will also check your credit file for details of your debts.
Lenders will work out how much you can afford by checking:
- Your income and spending
- How much money you have left over after bills and living costs
- If you can afford to pay the regular payment to the debt
Lenders should take these same steps when they extend a credit agreement or refinance an agreement.
When a borrower applies for a guarantor loan, the lender must do an affordability check for both the main borrower and the guarantor.
What should I do if I have been refused credit after an affordability check?
It is frustrating when an affordability check stops you getting credit. But it is important to understand that borrowing this money could have put you in financial hardship.
Ask yourself the following questions:
- Do you really need to borrow more?
- Will you find it hard to manage without borrowing money?
- Are you struggling with any other debts?
If the answer to any of these questions is yes, it could be a sign that you need debt advice.
What happens if I give wrong information to a lender?
When you are going through an affordability check, you must be as truthful and accurate as possible. Things can quickly spiral out of control if you borrow more than you can afford.
Giving wrong information can:
- Lead to your affordability complaint being refused. If you make a complaint about irresponsible lending, the lender might say you have them bad information. But you can argue that they should have asked for more detail, like bank statements or wage slips
- Cause problems next time you apply for credit. Some lenders use a fraud prevention service called National Hunter. It flags up differences on previous application forms