Customers have several products, like lines of credit, to choose from in order to meet their financing needs. Though each one is different, banks and consumers must handle all of them responsibly to ensure their and society’s financial well-being.
In recent years, banks have undergone a major transformation to adopt business models that are more responsible towards their stakeholders. Meet Erik, who’s decided to live on his own. The place he's renting meets all his requirements but is unfurnished. To decorate it to his liking — without taking a chunk out of his savings —, he goes to his bank and asks about products that might fit his needs. A manager looks over his situation and suggests Erik take out a responsible line of credit, clearly pointing out every detail involved.
What is a responsible line of credit?
A responsible line of credit requires the bank to examine an applicant's ability to pay ethically and impartially so as to prevent over-indebtedness. It helps the bank anticipate a default that may harm the borrower's financial health, the bank and society. Banks promise to provide consumers with clear, straightforward details about these products.
It’s important to know the difference between a responsible line of credit and a responsible loan. Though both are managed ethically and professionally by banks, a line of credit is a banking product consisting of a set amount of money that borrowers draw down when they need. They must pay back the amount they draw with interest in instalments before they can withdraw more funds from the line of credit, which cannot exceed its limit.
With loans, a bank grants a borrower a set amount, which must be fully repaid in regular instalments over a set period. Loans have lower interest rates and higher repayment terms than lines of credit. Plus, when the borrower pays back the loan, the transaction is complete; lines of credit, however, tend to be renewed annually.
If you want to learn more differences between lines of credit and loans, read this article (in Spanish) by Finanzas para Mortales (Finance for Mortals).
What do responsible lines of credit mean for banks?
The United Nations’ Principles for Responsible Banking, which 130 banks (including Banco Santander) signed in September 2019, marked a milestone for society and the planet. It set banks on a path to create fairer products, like responsible lines of credit.
How do responsible lines of credit affect customers’ financial health?
While lines of credit and other responsible financial products aim to protect consumers’ well-being, consumers also must accept certain obligations.
Remember Erik, who was at his bank to see about a responsible line of credit, getting clear information from a manager? Let's say he ends up taking it out. As the borrower, he will have to act ethically and provide true, up-to-date information. Also, we must accept his payment obligations according to the line of credit’s terms and conditions. Therefore, if he has a full understanding of the line of credit and his obligations, due to the bank’s ethical advice about products, Erik will be able to: