Taking out a loan is a big decision for anyone so it is important to get it right first time, every time. Loan affordability assessment tools are mandatory for lenders and can really help customers when deciding whether or not to take out a loan.
One of the key things that all consumers should consider is affordability. Affordability is a massive consideration. If, for example, loan repayments are dependent on salary, is this guaranteed? What would happen in the event of unemployment? Would there be any savings in place? If there would, then why commit to a loan? The list is endless.
Lender affordability assessment tools
What do lenders use in order to find out if you can afford your loan?
To assist in reaching an informed decision, there are now various affordability tools available.
Renowned as being one of the UK’s most trusted credit source, recently released a paper. See their guide – affordability challenge. This looks at the many pressures surrounding responsible lending. Experian themselves are one of the UK’s leading credit reference agencies. Most high street lenders will conduct a credit search with them before approving a loan.
Experian also has a subsidiary company. See www.freecreditscore.com. This company offers consumers more generalised advice on the issue of affordability. It also provides an easy step-by-step guide on how to assess if credit is suitable. To achieve this it suggests:
- adding up current income and outgoings (using historical data where possible)
- gauging both the current and future interest rate (throughout the term of the loan)
- verifying the flexibility of the loan product itself (i.e. whether any charges apply)
- what the loan monies are for (and whether they’re essential in the circumstances)
The advice also goes on to suggest the need to ‘plan ahead’. By this, it suggests thinking about potential unemployment, unexpected expenses and so on. The ultimate goal is that every possible eventuality is risk assessed.
Experian also assists lenders with associated lending services. These include income verification, debt to income ratios and monthly disposable income scores. These can be particularly useful for lenders.
A loan applicant might, for example, over-exaggerate their income to attract credit. To prevent this from happening, Experian utilises data from “Current Account Turnover”. It also looks at incomes stated on previous credit applications.
A similar credit service is also offered by Callcredit. This company have focused on affordability since the Over-Indebtedness Initiative in 2006. This project addressed some of the key concerns surrounding over-commitment. It also looked at various ways of preventing consumers from falling further into debt.
Callcredit now offers a bespoke “Affordability Suite”. Here they can access around 97% of up-to-date current account information. It provides a single view of each consumer’s financial position. This can be invaluable for lenders to assess money management, monthly trends and affordability.
In the meantime, Aphility has also crept up as market leaders (see www.aphility.com). This company utilise secure, real-time digital capability to assess consumer affordability. This offering enables both consumers and lenders to undertake accurate affordability assessments. For consumers, this means they are better able to manage their finances.
Customer-facing affordability assessment tools
We found a bunch of useful tools available from various high street lenders. Of course, high street lenders must also play their part with affordability assessment tools. These consumer-facing tools are all available online – for example:
Tesco Online Calculator – see http://www.tescobank.com/tools/tools-and-calculators/
Bank of America Affordability tool see – https://loans.bankofamerica.com/en/tools/affordability-snapshot.html?standalone=y
For completely independent advice, consumers can use the affordability tool issued by the CAB. See: work out your budget
All these tools tend to be user-friendly and provide a useful insight for consumers. It also ensures the potential applicant considers their finances before making a final decision. Whilst each tool is a little different the outcome is similar. All tools ensure the consumer makes an informed decision.
Why not try our own payday loan affordability assessment calculator. Check it out to see if you can afford your loan. This, in turn, will help you understand what lenders look for when testing your loan affordability.
Avoiding footprints by using online affordability tools
Another key advantage for consumers is that affordability tools don’t leave footprints. Footprints are a lender’s way of assessing whether anyone has performed a credit search. If a high number of searches are evident then a lender might well reject an application. This is because it demonstrates volume applications. They’re also referred to as a “hard search”.
By using affordability tools, consumers only create a “soft search”. These aren’t recorded on credit files and so a lender won’t be able to see them either. As such, the consumer has a much higher chance of success in obtaining a loan. They also have that added peace of mind knowing they can afford it.
The importance of affordability tools
So it’s easy to see why assessment tools are invaluable to both lender and consumer. That said, they should never be a substitute for common sense or human intervention. The Financial Ombudsman Service reiterate the need for lenders to use their own judgment. Financial decisions should never be completely computer led. Instead, they should take the wider picture into account:
- Is the consumer’s position likely to change?
- What would happen in the event of unemployment, or with changes to employment?
- Do some (or all) of the consumer’s finances rely on someone else?
There are so many things for the lender to consider in each situation. As such, there should always be an element of flexibility to ensure complete affordability.
Lenders must also, of course, utilise their discretion with regard to vulnerable customers. This type of consumer can often become evident through the use of affordability tools. In this instance, lenders should highlight debt advice and provide specialist support where appropriate. This includes consumers with short to medium term issues.
Finally, emphasis needs to remain on consumer education. Affordability tools are central to this particular aspect. Whilst there are so many resources to assist with the issue it remains fundamental. Without proper advice and guidance, consumers can find themselves in a vulnerable position. Much of the time issues get resolved but not always.
It seems the importance of loan affordability tools has increased considerably. Using the most accurate and proven tools should remain fundamental.