The act of lending has been a part of human custom since time immemorial. There have always been generally understood rules involved. The lender provides money or goods with the belief that the borrower will repay them at an agreed upon time. The borrower operates under the assumption that this agreement is valid and will be adhered to completely. However, the truth is that many borrowers do not repay loans and many lenders operate in a manner that is deplorable.
Responsible lending is vital to any business that operates as a money lending service. The most basic form of responsibility is two-fold. The lender must determine that the borrower has the means to pay back the loan. The lender must also make certain that the loan meets the needs and requirements of the borrower. This is not just good business sense; it is also good customer service. A borrower will be far better served by being told whether or not a loan option can feasibly be repaid with their amount of income and finances.
Lending agencies that provide responsible will need to determine the borrower’s credit score and make certain that they earn enough money to repay the loan. These two factors allow the lender to discern the probability of repayment in a timely manner. However, responsible lending goes beyond these factors. If an agency wishes to be a responsible lender they will need to act within the laws of financial lending and provide a detailed summary of repayment requirements.
Transparency is one of the most important factors for responsible lending. Once it has been determined that a borrower has the means and the desire to repay a loan, it will be necessary to agree upon a full-disclosed transaction. The legendary concept of a borrower being caught by the fine print is a form of highly irresponsible financial lending behavior. While there is nothing wrong with fine print writing, there is something inherently wrong with a transaction that does not include a detailed explanation of what the fine print means.
There are basically two types of loans. These loans are secured and unsecured. Secured loan types require collateral and a hefty down payment in most instances. The unsecured loan type involves only an agreement and the possibility of a down payment. It is vital to proper lending agreements that a loan lender determines in advance that they can provide unsecured loans that can be paid back. A secured loan will require collateral that helps cover the cost of the loan if the borrower defaults. Unsecured loans are more dangerous financially and must be held to a higher standard to ensure that all borrowers are treated fairly within an agency. It would be grossly unfair for an agency to be forced to raise their interest rates solely because they lend unsecured monies to anyone who asks regardless of financial solvency and credit history.