What is an affordability assessment?

If you’ve ever heard the term ‘affordability assessment’, you may have been left wondering what it means and exactly what is involved.

All UK lenders are facing increasing pressure to demonstrate that they are lending responsibly, and central to responsible lending is an assessment of customer affordability.

Put simply, an affordability assessment is the process which lenders must complete to establish if a person can afford to repay the finance they wish to borrow over the agreed term.

Why do I need an affordability assessment?

It’s important that any loan is manageable for you to avoid running into difficulties. The finance you are offered will be determined by the outcome of an affordability assessment.

If a lender hasn’t done proper affordability checks, they may give you a loan that’s larger than you need, or that you can’t afford to pay back. This could leave you with a choice of cutting back on your essential living costs to keep up with the payments, or missing payments which could lead to your account defaulting.

How do affordability assessments work?

All lenders have their own set rules and methods for assessing the affordability of a financial product, however, as general rule of thumb, you should be prepared to provide evidence of the following:

Regular income – Employed, self-employed or unemployed. Payslips, bank statements or proof of benefits awarded should suffice.

Overheads and expenses – Credit cards, loans, school fees, childcare, child maintenance, housing, rent, phones, travel, insurances, food, entertainment, fuel, heat, and light. These are examples of outgoings that must be taken into consideration when assessing your affordability.

Your lender will also want to ‘stress test’ your finances. In other words, they’ll want to find out what might happen should your circumstances change, for instance if your childcare or your rent increases.

“As a Firth Finance customer, you may be asked to provide copies of documents as proof of income. Any documents copied or photographed are held in a completely secure server. They’ll be reviewed by our expert team to make sure everything is good to go, and nothing will ever be shared with anyone but you.”

What happens if I fail an affordability assessment?

If you’ve been refused a loan after an affordability assessment you first need to decide whether you really need to borrow money. Could you manage without? Being refused credit can often be a sign that you need help with money, especially if you have other debts that you’re struggling to manage.

A lender may still be able to offer finance to you, albeit on different terms to those you initially requested.

It is worth mentioning that when you apply for finance a credit check is also undertaken and recorded on your credit file. If you approach different lenders several times in succession, this can indicate desperation for credit and may be negatively viewed by lenders.

What can I do to pass an affordability check?

It’s important that you’re honest about your personal circumstances. However, in advance of your application for finance, review your incomings and outgoings. Paying off existing debts, reducing your outgoings, and increasing your income can all help when it comes to your affordability assessment.

About Firth Finance

Fully authorised and regulated by the Financial Conduct Authority, we are the financial provider of choice for our many happy customers throughout Northern Ireland.

Our customers are at the centre of everything we do, and we work hard to instil our family values and morals in the relationships that we build.

We provide small loans with a range of manageable and interchangeable repayment options, making it simple for you.