It used to be simple for you to transact with lenders. They would assess whether they could make a profitable loan to you. They also assessed the probability of the default on the loan to price it based on that risk. However, in recent years the process has changed.
Today, besides assessing whether a loan will be profitable, lenders assess whether a consumer can repay a loan. This is a requirement made by regulators in both the US and UK. It ensures that lenders do not cause distress to vulnerable consumers by overburdening their debt load or supplementing risky behaviour. Whether this requirement leads to unintended consequences for the consumer is debatable. The reality is that lenders need more than a consumer’s credit report and score when reviewing financial information. The name for this extra step is Loan Affordability and it generally takes on six criteria.
How lenders assess Your Loan Affordability
Verification of income
Lenders must now verify that self-reported information on loan applications is actually true. In doing this they need access to bank account statements in a physical form or an automated form. The lender will also check to see if the amounts deposited into the account match with the application information.
Assessment of quality of income
Lenders will check the incomings to the account to see if the amounts over a 3 month period are consistent. They will then weigh the quality of those income streams based on whether it is a salary, bonus, one-off payment or government subsidy. A consistent salary at a higher rate is weighed higher than the other items.
How many loans you currently have outstanding
Lenders will check the consumer’s current debt by comparing their outgoing amounts to existing financial commitments. Lenders view a high amount of existing debt before applying for a new loan as a negative signal.
Amount of disposable income vs. the monthly loan amount to be repaid
This is the most important aspect of the loan affordability assessment. Lenders will deduct fixed payments such as utilities, mobile phone, and rent. They will also deduct some discretionary items such as shopping, dining, and any miscellaneous items. The lender will weigh 100% against fixed obligations and provide their own discretionary weighting to other amounts. They will then compare the disposable income to the monthly loan repayment required for the new loan to assess if the consumer can, in fact, repay the loan.
Gambling
Lenders view the presence of gambling activity by regulators as a sign of risk. It is also seen as an indicator of a higher risk consumer to potential vulnerability. Lenders are not advised to support perceived risky behaviour such as gambling.
Bounced checks
Even if you look able to afford a loan, the presence of bounced items may call into question your ability to pay your loans on time and according to terms.
We have teamed with Account Score to create the Loan Affordability tool and bring what currently happens today, to the consumer. This way you have the ability to understand exactly how lenders view you.
Tap Into The Digital You at ScoresMatter.