Affordability checks

An affordability check is undertaken when you want to take out a new loan (such as a mortgage or a credit card). This is carried out to make sure you’re likely to be able to repay the money you’re requesting and that lending you the money won’t lead you into financial hardship later down the line.

To help you prepare for an affordability check, it’s helpful to have the following detail to hand:

• Information about your income (including your employment details and any other income you might receive such as benefits or child maintenance)
• Any bank or credit card statements
• Details on your daily expenditure
• Any other information about your finances that you feel might be useful

If you already budget monthly, it’s helpful to have a copy of this to hand. If you don’t, it’s worth checking out our budgeting page to start putting one together, so that you have all your regular financial information in one place.

Reasonable and proportionate checks

The Financial Ombudsman Service (FOS) provides the following helpful information around reasonable and proportionate checks.

It states that there’s never been a “set list” of checks that lenders need to carry out, but, given the relevant law and regulation, regulators’ rules, guidance and standards, codes of practice, and what the FOS considers to be good industry practice at the time, they’d typically reach the view that a reasonable and proportionate check would usually need to be more thorough in the following circumstances:

• The lower a customer’s income
• The higher the amount due to be repaid
• The longer the term of the loan
• The greater the number and frequency of loans, and the longer the period of time during which a customer has been given loanstrue

The FOS goes on to say that a less detailed affordability assessment, without the need for verification, is far more likely to be fair, reasonable and proportionate where the amount to be repaid is relatively small, your financial situation is stable, and you’ll be indebted for a relatively short period of time.

However, in circumstances where your finances are likely to be less stable or you’re being expected to repay a larger amount for a longer period of time, it’s far more likely that an affordability assessment will need to be more detailed and contain a greater degree of verification in order for it to be fair, reasonable and proportionate.

What will the FOS look at if I want to make a complaint about unaffordable lending?

The FOS will consider:

• Did the lender do enough to get a reasonable understanding of whether you’d be able to sustainably repay payments to the loan?
• If you have an open-ended agreement or a running account (such as a credit card or catalogue account), would you have been able to sustainably repay the amount lent within a reasonable period of time?
• What happened during the course of your history with the lender and/or what the lender gathered at the time to assess your affordability
• If you’re classed as being a vulnerable customer, what care did the lender take? It’s important to note here though that these situations can be difficult as in some cases, the lender may not have been aware that you were vulnerable at the time of completing this check

What happens when the FOS decides a customer has been treated unfairly:

• They’ll ask the lender to put things right but what this will involve depends on the nature of your complaint, and how you lost out
• They’ll likely ask your lender to make sure your credit file doesn’t have any adverse information recorded about a loan where the FOS have identified proportionate checks would have shown you couldn’t sustainably repay the loan
• The FOS may also award you with additional compensation if they think you were caused distress or inconvenience, but this is entirely dependent on the circumstances of your case

To find out more about the FOS’s stance on unaffordable lending, click here.