There’s been a rapid increase in buy now pay later and interest free credit deals in the UK and across the world, offering consumers more options when it comes to purchasing goods and services. With the market showing no signs of slowing, the concept of responsible lending is now more important than ever.
Rather than steep late payment penalties and spiralling interest rates, responsible lending is about putting the customer first, acting in their best interest to ensure they can truly afford the product they are purchasing, while remaining transparent.
Here, we look at what responsible lending is, why it’s so important, whether it’s regulated, and why we at DivideBuy take it so seriously.
What is responsible lending and why is it so important?
Responsible lending means putting the customer and their best interests first when deciding whether to approve a financial product.
This means lenders assessing areas such as the affordability of the debt and how likely the borrower is to be able to repay without it having a significant negative impact on their financial situation.
It also means the borrower must be given, in a clear and easy-to-understand way, all the necessary details about the financial agreement they are entering, so they can take an informed decision about whether to proceed.
A responsible lending decision is likely to have several aspects and require information from the potential borrower, as well as their credit history via a credit check with one of the UK’s credit reference agencies (CRAs). This data is designed to help the lender assess the borrower’s ability to repay and the likelihood that they will do so based on their past credit management, to make sure they have the means to make repayments on top of any other financial commitments they already have.
Responsible lending is important as it puts the borrower at the centre of a lending decision, aiming to avoid making financial agreements that are not sustainable, or that will put them in financial hardship with regards to managing their repayments.
Borrowers must be treated fairly and shouldn’t be offered financial products that are not appropriate to their circumstances.
The different types of credit – and the options on offer
For clarity, consumer credit, which can be offered by banks, retailers and specialist finance companies, comes in two main forms. These are revolving credit, such as credit cards used to pay for everyday products and services at the point of sale, and instalment credit, which is used to pay for a specific product and issued as a defined amount.
In terms of the options on offer when it comes to credit, deals are either interest bearing or interest free.
The former means the lender multiplying the amount owed by what’s known as an interest rate, adding that to the total of what they must repay.
The latter, which is offered by DivideBuy across all our retailer financing solutions, is a credit option that’s totally interest free to customers, meaning they benefit from the convenience of splitting the cost of a purchase without paying additional charges on top. For more information, visit our blog on the different types of consumer credit.
Whether the credit agreement is to spread the cost of a large purchase with interest free credit or is to provide finance for any other kind of borrowing, it’s important that the lender clearly communicates the terms and conditions, including repayment rules and the full cost of borrowing, so that the customer can make an informed choice on whether to commit.
Is responsible lending in the interest free credit space regulated?
The Financial Conduct Authority (FCA) is the governing body that regulates UK lenders, although this regulation doesn’t extend to finance providers in the buy now pay later and interest free credit space. That means there is no requirement for these lenders to carry out assessments into creditworthiness or finance when taking on new customers – for now. Despite that, at DivideBuy, we take this element very seriously – carrying out credit checks on behalf of our retailers when customers sign up to make a purchase, also offering an initial ‘soft search’ check of their credit file.
With the Government having run a consultation seeking views on the creation of a “proportionate approach” to the regulation of such products, a legal requirement is expected to be brought in shortly.
The consultation closed in January having been launched last year after the potential risk of consumer detriment was highlighted in the Woolard Review into change and innovation in the unsecured credit market.
It also sought views on a range of controls that could be put in place for buy now pay later products, focussed on the elements of lending practice “most closely linked to potential consumer detriment”.
The outcome of the consultation is expected later this year (2022), with the legislation expected to be brought forward to Parliament in due course.
Supporting borrowers throughout the duration of the credit agreement
Just because the space is not yet regulated by the FCA, DivideBuy has always has a strong commitment to responsible lending – and that’s certainly the case in how we support borrowers throughout the duration of their credit agreement, not just at the start.
Sometimes, circumstances do change and despite the borrower being able to manage repayments without difficulty at the start of the agreement, this might not always be the case throughout the whole term. Responsible lenders should also offer support to borrowers if they start experiencing problems with repayments.
When contacted by a borrower who is having issues making repayments, responsible lenders should react positively and sympathetically to the borrower and take steps to understand the circumstances involved before proposing a solution. The kind of solution will vary depending on the type of credit involved and the specifics of the situation, but could include aspects such as payment plans or payment rescheduling to make it easier for them to repay the debt.
Responsible lenders won’t hide charges or other associated costs from borrowers
It’s important that potential borrowers understand exactly what they are going to be signing up for when they take out a credit agreement. This means that they need to understand how the repayment process works and the full cost of borrowing (if interest is being charged), so that they can compare this with other types of solution and decide which is most suitable for them and their circumstances.
Responsible lenders ensure that they are transparent about any fees involved, such as late payment fees or early repayment fees, and make the cost clear if any interest is being charged.
DivideBuy and responsible lending
DivideBuy does not charge interest on purchases made and there are no hidden charges. We take steps to make sure that borrowers are always aware of the amount of credit involved and how this will be repaid before the agreement is finalised.
We take responsible lending very seriously. Our customers are very important to us and we want to make sure that we’re making credit decisions in every customer’s best interests. You can find out more about how DivideBuy encourage responsible lending here.
Our customer service team is also on hand if you have any questions about our responsible lending policies and processes, or spreading the cost of a purchase with DivideBuy.