Understanding affordability checks for loans

Are you thinking about getting a payday loan? If so, it’s essential for you to know what an affordability check is and why it matters to you.

An affordability check is a test run by a lender during your application process to see if you can easily afford to repay the loan amount you are requesting without putting you under undue financial strain.

Affordability check process

When you apply for a payday loan, you’ll be asked to share details about your monthly income and also your monthly expenses. The lender will use this income and expense information to calculate something called your Debt to Income Ratio (DTI). To pass an affordability check, most lenders want your DTI to be below 43% of your total income. If your DTI is higher than 43%, you fail the affordability check and your loan may be denied on the grounds that the loan would strain your finances and not improve your financial well-being.

Tips for filling out your income and expenses loan application

When you fill out your loan application, be honest about how much money you make and what you spend. Include money from all your jobs and any benefits you get. For your expenses, only put down what you actually spend. For example, if your job helps pay for your travel, don’t include that in your travel costs. 

Affordability check with bad credit

Payday loan lenders look at your whole financial circumstances when doing an affordability check, not just your credit score. So, even if you’ve poor credit, you can still apply for a loan with most payday lenders. But if your credit score is bad you can expect to be charged higher interest rates.

The importance of affordability checks

These checks are done to make sure you’re not taking on more debt than you can handle. It’s all about keeping you safe from financial stress. Plus, being honest on your application is super important. If you’re not, it could make things harder for you later when you need to borrow money again.

Understanding your rights with payday loans in the UK

When you apply for a payday loan, it’s important to understand the rights and protections you have under UK law. Payday lenders are regulated by the Financial Conduct Authority (FCA), which ensures fair practices and prevents exploitative lending. Here’s what you need to know about your rights:

1. Loan Transparency

Lenders must clearly explain all costs, including interest rates, fees, and repayment terms, before you agree to a loan. If this information isn’t provided upfront, the lender is breaking FCA rules.

2. Interest Rate Caps

In the UK, payday loans have strict interest rate caps:

• Daily Interest Limit: No more than 0.8% per day.
• Default Fees Cap: No more than £15 if you miss a repayment.
• Total Cost Cap: You’ll never pay back more than double the amount you borrowed.

These caps protect borrowers from excessive charges.

3. Cooling-Off Period

After signing a loan agreement, you have the right to cancel it within 14 days. You’ll need to repay the amount borrowed plus any interest accrued, but no additional fees can be charged.

4. Complaints Process

If you believe a lender has treated you unfairly, you can file a complaint. Start by contacting the lender directly. If they don’t resolve the issue within 8 weeks, you can escalate your complaint to the Financial Ombudsman Service for free.

5. Fair Debt Collection Practices

Lenders must follow fair and legal practices when collecting unpaid debts. They cannot:

• Harass or pressure you into making repayments.
• Visit your home without prior agreement.
• Contact you at unreasonable hours.

If a lender violates these rules, report them to the FCA immediately.

What to do if you fail an affordability check

If you fail the affordability assessment and don’t get approved for a loan, think about whether you really need to borrow money right now. Sometimes being refused is a sign that you might need some help managing your money. There are places you can go for advice and help if you’re finding it tough to keep up with your bills and debts. You can contact the National Debt Line to assist you. You can speak with a real person over the phone to discuss your situation or access their debt help resources on their website.

The bottom line:

When you’re thinking about a payday loan, remember how important the affordability check is. It’s there to help you make sure you can comfortably pay back the loan without putting yourself in a tough spot. And if things don’t work out with the loan this time, there’s always a chance to try again in 30 days if your circumstances change or you can check out some alternatives to payday loans.