If you’ve ever thought about taking out a loan or mortgage, you might have heard the term affordability. But what does it really mean, and how can it affect whether your application is approved?
In this blog, we’ll explain loan affordability, why it matters, and what lenders look at when deciding if you can borrow.
What does affordability mean?
Whenever a lender considers giving someone credit, they run affordability checks. These checks help them see if you can comfortably afford the repayments on the loan you want.
Put simply, if the lender thinks the payments will put too much pressure on your finances, they’re unlikely to approve your application.
Why do affordability checks exist?
Lenders need to make sure any loan or mortgage is affordable for you both now and in the future. So, these checks exist to protect you from taking on debt you can’t handle and to prevent lenders from approving loans that could cause harm. In summary, they’re there to help make sure you don’t end up in a situation where your repayments become a struggle.
What do lenders look at when assessing affordability?
When a lender looks at your loan or mortgage application, their main priority is making sure you can comfortably afford the repayments. To do this, they look at two key areas, your income and your outgoings.
Income
Lenders look at all the money you have coming in each month, including:
- Your basic salary or regular wage
- Income from benefits, pensions, or any investments you have
- Any additional earnings such as bonuses, overtime, commission, or side income
The more stable and consistent your income is, the more confident lenders will feel about your ability to keep up with repayments.
Outgoings
Next, lenders review your regular monthly expenses. These typically include:
- Essential living costs such as rent or mortgage payments, utilities, water, council tax, and other household bills
- Credit card payments and any ongoing borrowing
- Existing loans or finance agreements (e.g. car finance, personal loans)
- Insurance policies and subscription payments
To speed up the process and get a decision in principle, it’s a good idea to get your key documents ready before applying. Lenders may ask for:
- Recent payslips
- Bank statements
- Proof of benefits or other income
- Details of any existing credit commitments
Having these ready can help the lender assess your affordability quickly and give you a clearer idea of what you may be able to borrow.
Summary
Understanding affordability is a key part of preparing for any loan application. Lenders aren’t just looking at your credit history, they’re looking at your whole financial picture to make sure you can manage the repayments comfortably. By looking at your income, outgoings, and overall financial stability, they can work out whether the loan is right for you.
Loans are secured against property - Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
