Responsible lending and debt consolidation: what do they mean?

If you want to borrow money, on a credit card, loan or overdraft, prospective lenders will need to consider your financial circumstances before making a lending decision. 

Banks and building societies along with credit card and loan companies may have different lending criteria but must all demonstrate ‘responsible lending’ practices. This comes under rules set out by the Financial Conduct Authority, (FCA), which is the organisation responsible for regulating the financial services industry.

What does responsible lending mean?

‘Responsible lending’ requires lenders to make an assessment, not just of whether their customers will repay, but of their ability to make repayments affordably, without this significantly affecting their wider financial situation. This means that lenders often want to check how well you manage your money, especially when it comes to your track record with borrowing and repaying on time. 

As well as checking your credit score and credit report, (which acts as your ‘Financial CV’), a potential lender will often ask questions to establish your income, monthly bills and regular outgoings in order to ensure you can afford to repay any money borrowed.  

The Financial Conduct Authority’s rules also state that credit card companies must monitor customers who get stuck in a ‘persistent debt’ cycle, including those who repeatedly make only the minimum monthly repayments over a three-year period.   These responsible lending practices also extend to ensuring providers help customers who are struggling with repayments, by either offering them the option to switch to lower rate products, and in some cases, suspending customers’ credit cards to prevent debts building up further. 

However even when lenders carry out all the necessary checks before approving customers’ applications, changes in circumstances can happen during the term of the loan which could have an impact on your finances.  

Where you are making monthly repayments across multiple loans, credit cards and overdrafts, you may find consolidating your loans into one manageable monthly payment could be a good option. 

Debt consolidation loans aren't right for everyone. It's important to check all the options available to be sure you're making the right choice.
Debt consolidation may involve extra costs and could make a difficult situation much worse. That's why it's very important to get free, expert debt help before taking out a consolidation loan.

Debt consolidation 

The way debt consolidation works is that instead of making separate monthly repayments to everyone you owe money to, you combine, (or consolidate), all your debts in one place.  You would take out a new loan, which enables you to pay off, or settle, what you owe and streamline repayments into one single monthly amount, making repayments easier to track and manage moving forward.   

If the APR on your existing credit is lower than the rate you are offered and/or you take the loan out over a different term, it may mean you pay more interest and take longer to repay the balances outstanding.

Debt consolidation loans are offered as both ‘unsecured’ and ‘secured’ loans.  If a loan is ‘secured’, this usually means your home will be used as collateral. Your home is at risk If you don’t keep up your repayments on a secured loan.

With an unsecured personal loan you can typically borrow between £1,000 – £30,000 over a period of one to five years which could be a much cheaper form of borrowing than credit cards, store cards or overdrafts.  

Interest rates on personal loans typically start from under 3%, compared with average credit card rates of over 26%, according to Moneyfacts financial information service. 

If your application is approved, funds are generally paid direct to your bank account, which means you take responsibility for paying off your outstanding debts. 

If you take out a fixed rate loan, the interest is fixed for the life of the loan, which means monthly payments won’t change, and providing all the repayments are met, the loan is paid off at the end of the term. 

There’s no ‘one size fits all’ 

When it comes to deciding whether to consolidate borrowing in this way, there’s no ‘one size fits all’ as there are several things to consider.

• While interest rates on personal loans are generally much lower than other forms of borrowing, there’s no automatic guarantee, that when you apply, you’ll be offered the low ‘headline rate’.  The interest rate you will be offered will be dependent on your individual circumstances and the amount you want to borrow and term.  If you don’t have a good credit record, you may not get approved for a loan. 
• Paying off ‘old’ debts may incur fees, for example some loan companies may charge penalties for ‘early redemption’, which needs to be factored into any decision over whether consolidation is the right move.    
• There can be cheaper ways to repay debts instead of debt consolidation, like moving existing credit card or store card debts to a card with a lower interest rate or a 0% ‘balance transfer’ deal.  Once again, whether you are accepted for this will depend on your credit record. 
• This means no interest to pay during the introductory term, so monthly repayments go directly towards chipping away at the debt.  It is important that you clear the balance before the introductory term has ended, otherwise the interest will start to be applied.    Some 0% cards may charge a ‘balance transfer’ fee of up to 3%.  You should be mindful of any promotional rates that only apply for a certain amount of time.