When is lending irresponsible and unaffordable?
There are various reasons why lending can be considered unaffordable, but in this blog, we are going to focus on customers who already have multiple credit commitments.
You might already be making repayments towards a loan every month, perhaps also trying to repay a hire purchase agreement whilst also making monthly payments to credit cards. You then find a new lender to borrow money from. That lender should be considering whether you are already over-committed with dedicating large proportions of your income towards existing credit commitments – and they should be thinking about whether you can afford more borrowing on top.
Should I be allowed to borrow more money?
That is down to the lender: every regulated lender in the UK has a duty to carry out proportionate checks before lending money. But there are no hard and fast rules when it comes to lending money to someone who is already juggling their outstanding borrowing.
As early as 2006, there was detailed guidance set out for responsible lending practices. Whilst not every lender was a member of the Finance & Leasing Association, it is a useful indication of what can be considered as good industry practice:
“We may also consider factors which may show a high risk of experiencing financial difficulty which include:
- having four or more credit commitments;
- spending more than 25% of your gross income (before deductions) on consumer credit”
(https://www.fla.org.uk/consumer-information/lending-code/fla-lending-code-archive/)
This guidance suggested to lenders that, customers who are already dedicating more than 25% of their income towards current credit commitments, are at risk of not being able to afford new borrowing. Customers inevitably have to dedicate their monthly income towards housing costs, bills, food and transport; so, if there are existing loan and credit commitments added on top of those monthly expenses, then it may not be responsible to lend to that customer.
Credit commitments as a percentage of income…
We have seen examples of ombudsman decisions ruling in customers’ favour: outlining that a customer was already dedicating a significant proportion of their income towards existing borrowing – so that even more borrowing was not going to be appropriate:
“…she was now spending around £590 a month to service her existing debt. And she had told the lender that her income had fallen to £1,498 a month. From this information I think 118 118 Money ought to have realised that Ms Y was already spending a significant proportion of her income on her existing credit commitments and increasing this further would mean there was a high risk the loan would be unsustainable for her.”
(https://www.financial-ombudsman.org.uk/decision/DRN-3150285.pdf)
Therefore, in the above real-life example:
The customer’s income was £1,498 per month
The customer was spending £590 of that per month towards credit commitments.
This meant that around 39% of her income was going towards credit commitments.
Another ombudsman decision said:
“I don’t think Likely Loans sufficiently reacted to the results of his checks, the checks show that Mr D would be paying a significant portion (£824.55) of his monthly income (£2,130) towards unsecured and debt. There’s an argument to say based on Mr D’s credit repayments, Likely Loans shouldn’t have lent.”
(https://www.financial-ombudsman.org.uk/decision/DRN-3640187.pdf)
We could summarise the situation for the above customer as follows:
The customer’s income was £2,130 per month
The customer was spending £824.55 of that per month towards credit commitments.
This meant that around 38% of his income was going towards credit commitments.
What does this mean for an Unaffordable Lending claim?
Assessing the amount being paid towards existing debts and credit commitments each month will not provide the full picture of whether any new lending is sustainable or not. However, it can be a good guide; the higher the percentage of income going towards credit means a much higher risk that a customer cannot sustain their normal living costs, let alone any new borrowing on top.
If lending is deemed irresponsible for this (or any) reason, you can expect to get your interest charges on that borrowing refunded back to you.