Regulated Agreement Limit: Understanding the Basics

When you`re applying for credit, you might come across the term “regulated agreement limit.” This is an important concept to understand because it affects how much you can borrow. In this article, we`ll break down what the regulated agreement limit is and how it works.

What is a regulated agreement limit?

A regulated agreement is a type of credit agreement that is regulated by the Financial Conduct Authority (FCA). Examples include personal loans, credit cards, and hire purchase agreements. The regulated agreement limit is the maximum amount that can be borrowed under such an agreement.

The FCA sets the regulated agreement limit to protect consumers from borrowing more than they can afford to repay. The limit is based on a borrower`s income and financial commitments, and lenders must carry out affordability assessments before granting credit.

How is the regulated agreement limit calculated?

The FCA requires lenders to use a minimum income multiple of 0.5 when calculating the regulated agreement limit. This means that the limit can`t be less than half of the borrower`s income.

For example, if you earn £20,000 per year, the minimum regulated agreement limit would be £10,000. However, lenders can use higher income multiples if they believe the borrower can afford to repay the loan.

In addition to income, lenders will also look at the borrower`s financial commitments, such as rent, mortgage payments, and other debts. These expenses will be subtracted from the borrower`s income to determine how much they can afford to repay each month.

Why is the regulated agreement limit important?

The regulated agreement limit is important because it ensures that borrowers don`t take on more debt than they can afford to repay. Lenders have a responsibility to carry out affordability assessments to ensure that borrowers can afford the repayments.

If a borrower has financial difficulties and can`t make the repayments, they have the right to seek help from debt advice services. The lender must also work with the borrower to find a solution that takes their circumstances into account.

In summary, the regulated agreement limit is a key aspect of responsible lending. It ensures that borrowers only take on debt that they can afford to repay, which helps to prevent financial problems in the future. If you`re applying for credit, make sure you understand the limit and how it affects your borrowing options.