Borrowing

Borrowing

Contents

How to find out if a lender is authorised

A lender should state that they are authorised and regulated by the FCA. If they don't, you shouldn't borrow money from them. However, even if they do, you should still check the FCA's Financial Services Register to confirm that they are in fact authorised to carry on consumer credit activities.

There are reputable lenders who'll consider lending to you even if your income is low, your credit rating is poor or you only need a small amount for a short while. You may still have to pay a high rate of interest but the Consumer Credit Act will cover your loan agreement. Always shop around for credit though - just because a lender is authorised doesn't necessarily mean you are getting a good deal.

Authorised lenders

Personal loans

A personal loan can be obtained from banks or other financial institutions. It is usually repaid in fixed monthly instalment over a set number of months at a fixed or variable interest rate. You will be charged a fee if you are late with an instalment. The credit agreement that you sign on taking the loan will tell you whether you can repay the loan early to save interest, or whether there will be an early repayment penalty. If the loan is secured, the securing asset will be at risk if you do not keep up with the payments.

High-Cost Short-Term Credit

One of the well-known High-Cost Short-Term (HCST) lending services is what is known as 'Payday lending'. 'Pay-day-lending' gets its name from the fact that a borrower has to pay back the full amount of the loan plus all interest and costs when they next get paid by their employer.

All types of HCST lenders must be authorised by the FCA to carry on consumer credit regulated activities. They also have to comply with conduct rules set out by the FCA in its consumer credit sourcebook.

Some of these rules include:

  • interest and fees must be capped at 0.8% per day;
  • default fees cannot exceed £15;
  • they are not allowed to recover more than 100% of the loan amount as the total costs of the loan (for example, if you make a loan of £100 for 30 days, the total fees and charges cannot be more than £24 if you pay the debt off on time);
  • before granting a loan they have to provide you with an information sheet that includes details on how to get free debt advice; and
  • a loan may not be rolled over more than twice.

Credit Unions

If you're on a low income and you need to borrow a small amount for a short time, look into borrowing from a credit union. Credit unions are co-operatives which mean that members pool their money to lend to other members. As a member of a credit union, you'll be able to lend at a much cheaper interest rate than is possible in the rest of the credit industry. Loans of small amounts over a short period, which commercial lenders don't usually give, are also possible.

Further information on this for:

Unauthorised lenders ('Loan sharks')

Dealing with loan sharks

The best advice for dealing with loan sharks is 'don't'. They lend money illegally, charge high interest rates and sometimes use threats and violence to get people to pay them back.

What is a loan shark?

A loan shark is not authorised by the FCA. To lend money legally, the lender has to be authorised by the FCA. If authorised money lenders don't comply with the rules, they'll lose their right to carry on their moneylending activities. However, because loan sharks are not authorised, they operate outside the law. If you borrow from them it's likely that you'll:

  • get a loan on very bad terms;
  • pay an extortionate rate of interest;
  • be harassed if you get behind with your repayments; or
  • be pressured into borrowing more from them to repay one debt with another.

What to do if you have borrowed from a loan shark

If you have borrowed money from a loan shark, you are under no legal obligation to repay the debt. You should instead report the lender to the Illegal Money Lending Hotline.

Is it a crime not to repay a loan from a loan shark?

If a lender isn't authorised by the FCA, they are committing a criminal offence if they carry on consumer credit activities. In these circumstances, they would also have no legal right to recover the debt. Loan sharks sometimes frighten people by saying they'll be prosecuted and even sent to prison if they don't pay up. This can't happen – not repaying a loan from an illegal lender isn't a criminal offence.

What to do if you're being harassed

Any lender – authorised or not - who harasses you is breaking the law. You should report any loan shark or other person to the police if they harass or threaten you or use violence against you.

Where to get advice

Many organisations offer free help and guidance on money matters. Always get free, independent help before you pay a commercial service.