At the time of taking out a loan, a lender is supposed to assess your creditworthiness. To say that creditworthiness is not different from affordability assessment. The latter is part of the former. When it is said that a lender is to assess a customer’s creditworthiness, it means they will determine whether you will be able to repay the debt when it falls due or within a reasonable period if the type of credit is open-ended, such as credit cards and overdrafts.  

Affordability assessment is vital. Every responsible lender will carefully assess whether or not you can repay the debt. Do not assume that you can afford to pay back the debt just because your credit score is up to scratch. Your credit score throws light on your past payment behaviour. It cannot be a proof of your future repayment capacity. A lender will have to check your current financial condition to ensure you will not struggle with payments.  

How does a lender run an affordability check? 

First off, you need to understand that there is no one-size-fits-all rule to run an affordability check. The FCA does not prescribe to any lender how credit checks need to be made. There are various factors that lenders take into account in order to run an affordability assessment, which include the type and amount of credit.  

The FCA issues only the guidance, but not a specific rule that has to be followed in order to determine the creditworthiness of a borrower. It means every lender uses their own method to assess whether or not you are a responsible borrower.  

What factors do lenders consider while checking your affordability? 

In order to check your affordability, lenders will strictly focus on your current income sources. It is paramount for you to prove your repayment capacity. If your income is not sufficient, you will not have a loan approved. Lenders are not concerned about how much you earn. They would rather focus on how you manage your money. 

They would be willing to know how much money you spend every month. Do you manage to meet your expenses from your current income? Do you manage to retain some cash after covering all expenses? They will require you to submit your bank statement for the previous six months to understand the flow of cash.  

Despite a good credit rating, you may not be able to afford a loan 

Many people assume that they can have a loan approved just because their credit score is above par. This is a myth. There is no guarantee that your lender will sign off on your application just because your credit score is good. Bear in mind that having a good credit rating does not ensure your affordability. 

It is likely that you already owe too much debt, and taking out another loan will burst your budget. Of course, a responsible lender will never take the risk of lending money to someone who cannot repay on time due to other obligations.  

A bad credit history does not always mean rejection 

Likewise, when you have a poor credit rating, you might struggle to get approval for a loan, but it does not guarantee rejection. Various lenders are out there who accept applications from subprime borrowers. They will check their affordability before approving a loan.  

Your bad credit history informs your lender of your past payment behaviour. It is likely that you fell behind on payments because of some unavoidable circumstances, such as you fell sick and were admitted in hospital.  

Affordability assessment means all lenders have to treat all types of borrowers fairly. Your lender will carefully examine your repayment capacity. If you have a considerable size of budget, you will be able to get approval for a loan.  

Interest rates will undoubtedly be high as your credit score is not perfect, but as long as your current financial condition suggests that you can keep up with the dates of payments without compromising on essential expenses.  

There is no fixed rule for lenders on how they use information from CRAs 

Credit reference agencies maintain your credit record, which lenders use to make a decision about lending. Bear in mind that the FCA does not set any rules regarding which information is to be used and which is not. In fact, they also use their own method to calculate your credit score. 

Lenders are obligation to assess your affordability based on sufficient information. All lenders have to decide on their own the extent of information they find suitable. The FCA does not advocate how the information is to be used.  

How to find lower interest rates 

It can be intimidating to get the best unsecured loans at lower interest rates, especially if your credit score is not perfect. The following tips can help you qualify for these loans at lower interest rates. 

• You should try to keep your credit score good. A stellar credit rating speaks volumes about your repayment potential. It suggests you did not miss payments in the past. The most affordable deals are exclusively available for borrowers with good credit histories.  

• Try to keep your credit utilization ratio low. An ideal credit utilization ratio is 30%. A high ratio will call your credibility into question. Lenders will most likely presume that you more often than not rely on credit. It is likely that you will struggle to discharge the debt if you borrow money when you already owe too much credit card debt. 

• A debt-to-income ratio is another factor that lenders take into account. This ratio does not affect your credit score, but it is checked in order to determine your affordability. A high debt-to-income ratio will make it hard for you to qualify for lower interest rates. It suggests how much debt you owe relative to your income. Lenders will be sceptical about your repayment capacity even though you have been meeting your obligations on time.  

The final statement 

Affordability assessment refers to the practice of determining whether or not you will be able to repay the debt. It depends on several factors such as your income and debt-to-income ratio.