Responsible lending

Responsible lending- more then just a requirement by law

In the lending and borrowing market there are contracts and guidelines. This is to establish a written agreement between the relevant parties, that both sides have understood what their responsibilities are and function in this situation. From the lenders side, they would have to be very clear, transparent and open about the contract and treat the borrower with honesty. Responsible lending is more than just meet the maximum and requirements by law; it is to go above and beyond in order to making sure that practice is occurring for the borrowers favor. This holds true for pay day loans, cash advances same as it does to other kinds of loans and even more so because of the higher risks and interest involved.

All that is written above sounds great on paper, but what do we really mean when we say "responsible lending" and how does it come to life?

Below there are a couple of principles that will help clarifying the term.

1. Is the pay day loan really needed?
This is a question the lenders should ask the borrower. Is it really necessary to take a pay day loan or any other kind of loan, for that matter. One should always ask oneself - could there be other options for obtaining the sum of money needed? Why not turn to a savings account that can be withdrawn?

2. Affordability
This is an underwriting that makes sure that all mortgages are verified from the lenders side, that the borrower actually has the possibility to repay the loan in full amount (including insurance and taxes) in the given time frame and repayment conditions. The lender should make sure that the repayment can be done without the need to refinance or sell the borrowers property if the loan is not repaid. In addition careful examination at the borrower's credit history, income should be done including looking forward into the future and forecasting the borrower's financial situation then. The fair practice from the lender should come forth if the borrower does not meet these standards now or in the future as well. The pay day loan or any other kind of lending should not be approved, and therefore not risking a house or property for foreclosure.

3. Improving the credit score assessment
Many people have a small or no credit history. Usually when there is no credit history, the borrower will need to pay more on the loan, and therefore there is a need for an alternative assessment of the credit. Most pay day lenders check the files of a credit agency to make sure the borrower can repay the loan.

4. Offering different options for a loan to the borrower
The borrower should receive a couple of different loan option with interest rates, and then he will need to make an informative decision based on the information that he received. He should take the following into consideration: the data about the full amount of the loan, from the beginning and to the end (interest rate increasing during the years for example).

5. Rates and fees
The lender should be honest to the borrower if he does not have the right offer that is appropriate to the borrower's needs and capabilities.

In conclusion

There are many more principles that can be thought of for responsible lending. But what is most important is the fact that lenders should make sure that after the borrower decides to take a certain offer, he really understands the loans conditions, terms and fees, therefore understanding the full contract before signing. This becomes even more important when it comes to pay day loans because of the higher risks involved from the lenders side and the speed of the loan which means that less involvement is required.

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