Loan affordability checks: what lenders must check

Before any lender gives you credit, it has to satisfy itself that you can afford the repayments. That is not a courtesy or a marketing step: any lender regulated by the Consumer Credit Act must complete affordability checks before lending you money, and nidirect guidance for consumers puts it plainly that all lenders must check your creditworthiness and satisfy themselves that you can afford the repayments before lending¹. The check normally covers your income, your regular bills and spending needs, and a look at your credit file for details of your debts¹.

The rules behind this sit in the FCA's Consumer Credit sourcebook, known as CONC. CONC 5.2A sets out what a firm must consider when it assesses creditworthiness, and that section was last updated on 4 November 2024³. The assessment is not only about whether the lender will get its money back. It is also about whether repaying the loan would harm your wider financial situation, which is why the check looks at what is left after your essentials, not just at your salary.

What a loan affordability check is

An affordability check is the process a lender goes through to work out whether you can repay what it is about to lend you, without that repayment squeezing out the things you have to pay for first. StepChange describes the usual starting point: the lender asks about your household budget, meaning your income and what you spend, and then checks your credit file for details of your debts¹. The two halves matter together. A large income does not make a loan affordable if it is already fully committed to a mortgage, existing credit and essential living costs.

The point of the exercise is set out in the FCA's rules. CONC requires a "creditworthiness assessment" that considers the potential for the lending commitment to "adversely impact the consumer's financial situation", as the Financial Ombudsman Service summarises when it deals with unaffordable lending complaints⁹. In other words, the lender is not just asking whether you are likely to pay it back. It is asking whether paying it back would damage your ability to keep a roof over your head and food on the table.

This is why an affordability check feels more intrusive than a simple credit score lookup. The lender builds a picture of your budget: what comes in, what goes out, what you already owe, and what would be left to cover the new repayment. The depth of that picture varies with the size and type of the loan, which is covered later in this page. But the principle is the same whether the loan is £200 from a credit union or a six-figure mortgage: the lender must be able to show, if challenged, what it checked and why it concluded the loan was affordable.

When lenders must check: new loans, extensions and credit increases

The obvious trigger is a new loan, but the duty reaches further than that. Payday lenders, for example, must check your creditworthiness before they give you a loan, before they roll a loan over, and before they increase the amount of credit⁴. The same logic applies to other forms of credit: guidance says lenders should run affordability checks before offering a credit card limit⁶, and that lenders should take the same steps when they extend a credit agreement or refinance one¹. An increase in what you can borrow is treated as new risk, not as a continuation of the old decision.

The rules also catch situations where you might not think of yourself as applying for anything. The FCA's guidance on buy now pay later says lenders need to check whether you can afford to repay before you take out an agreement¹⁰. And on mortgages, the position is stated bluntly by Macmillan's guidance for people affected by cancer: lenders must check if you can afford your mortgage repayments, and you may be refused a new mortgage even if you think you can afford it⁷. The check is the lender's to perform, and its conclusion is the lender's to draw, whatever your own view of your budget.

A refusal at this stage is not a punishment or a judgement about you as a person. It is the system working as designed: the lender could not satisfy itself that the repayments were affordable, so it did not lend. If you are refused, the sections later in this page on what to do next, and on guarantors and joint applications, set out the routes that exist. What you cannot do is talk a lender out of a check it is required to make, because the duty sits with the lender, not with you.

Credit risk and affordability risk: the two things lenders weigh

The FCA's rules split the assessment into two distinct risks, and the split explains a lot about how lenders behave. Under CONC 5.2A, the firm must consider credit risk, meaning the risk that you will not make repayments by their due dates, and affordability risk, meaning the risk to you of not being able to make repayments¹¹. Credit risk is about the lender's money. Affordability risk is about your life. A loan can be good for the lender's credit risk and terrible for your affordability, and the rules require both to be weighed.

The two risks pull in different directions in practice. A borrower with a spotless repayment record presents low credit risk, but if their income is already stretched to the limit by essential spending, the affordability risk may still be too high. Conversely, Shelter Cymru notes that it has recently become more common for lenders to make an affordability assessment looking at your whole financial situation when calculating how much they will lend you¹². The whole-picture approach is now the norm rather than the exception, and it is why two people with the same salary can be offered very different amounts.

Each lender weighs the factors in its own way. Which? reports that each lender will have its own affordability criteria and may place more weight on certain factors¹³. Where the affordability risk looks high because of a poor credit history, lenders may cover their risk by increasing the interest rates and the monthly payments, as StepChange explains in its guidance on bad credit mortgages¹⁴. On mortgages, lenders also stress test your finances, checking whether you could still afford the payments if interest rates were to rise¹⁵. The Scottish Government's response to the FCA's consultation on buy now pay later regulation captures the standard being applied: a reasonable assessment of not just whether the consumer will repay, but of their ability to repay affordably, without this significantly affecting their wider financial situation¹⁶.

Your income: why your word alone is not enough

Telling a lender what you earn is only the start. The lender has to verify what you tell it, and the Financial Ombudsman Service regularly upholds complaints where verification was too thin. In one case study, a couple complained that a secured loan was unaffordable, and the ombudsman found the lender's checks were not sufficient in verifying their expenditure¹⁷. In another, a loan company had not carried out enough checks before granting the loan, and the ombudsman concluded that a proportionate assessment of income and expenditure would have shown the loan was not affordable or sustainable¹⁸.

The word "proportionate" matters. The ombudsman does not demand the same depth of checking for every loan. In a third case, a complainant argued a logbook loan was unaffordable, but the ombudsman found the lender had completed reasonable and proportionate checks before deciding to lend, including an income and expenditure check that was verified with bank statements alongside a credit search¹⁹. Bank statements and credit searches are the standard evidence: the lender compares what you said about your budget against what your account actually shows, and against the debts recorded on your file.

This is where your own duty comes in. StepChange is clear that when you are going through an affordability check, you must be as truthful and accurate as possible¹. That duty is not just ethical. If the loan later goes wrong and you complain it was unaffordable, giving wrong information at the time can lead to your affordability complaint being refused¹. The lender's decision will be judged against what it knew and what it could reasonably have verified, and if you supplied figures that were wrong, the fault sits with the application, not the check.

Your outgoings: priority debts, essentials and estimates

The affordability rules protect some spending ahead of others. The FCA's CONC rules state that a repayment arrangement is unlikely to be sustainable if you cannot meet your priority debts and essential living expenses, and those include, but are not limited to, payments for your mortgage, rent, council tax, food and utility bills⁵. The same definition appears in the FCA's 2024 policy statement on overdrafts and credit, which changed the proposed guidance so that priority debts and essential living expenses include payments for mortgages, rent, council tax, food and utility bills²⁰. A loan that leaves you unable to cover these is not affordable, however healthy your income looks.

The same ordering is used by debt advisers. Business Debtline's budget guidance tells people to work out income and outgoings, deal with any priority debts first, and only then decide how to handle non-priority debts²¹. That is the shape of the assessment a lender performs too: essentials and priority commitments come off the top, existing credit repayments come next, and what remains is the headroom a new loan would have to fit into.

The stages of a creditworthiness assessment, from income evidence to the lending decision.

Estimates play a part, and that is legitimate. No lender itemises every coffee. But the ombudsman cases show where estimation stops being acceptable: when the estimate of your spending is implausibly low compared with your income, or when the lender did not verify expenditure at all¹⁷. The rules also require the lender to have regard to information it is aware of that may indicate you are in, have recently experienced, or are likely to experience financial difficulties, or are vulnerable, for example because of mental health difficulties or mental capacity limitations²³. A lender that ignores warning signs in front of it has not made a proper assessment.

Open banking in affordability checks: sharing your statements digitally

Increasingly, the bank statements a lender wants to see are supplied digitally rather than on paper. Open banking is a secure and regulated way for people and businesses to share access to payments data from their bank account with trusted apps and services, as the FCA describes it⁸. In a loan application, that means giving the lender permission to read your account data directly, so it can verify your income and spending without you gathering PDFs of statements yourself.

One provider, The Money Co-op, states that its everyday loan is subject to a credit check and open banking to establish affordability, and that it uses open banking to give a snapshot of transactions from the last three months²⁴. That is an example of a lender making open banking a standard part of its process rather than an option. Other lenders accept documents instead, so whether you have to use open banking depends on who you apply to.

Your control over the sharing is built in. Third-party providers need your explicit permission before they access your data, and participating banks and building societies should provide an authorisation dashboard where you can see a list of providers with permission to access your account data and withdraw permissions whenever you wish, at the press of a button²⁵. So you can stop sharing after the decision, though withdrawing permission does not reverse a loan that has already been made. The wider world of account-to-account payments built on open banking is described by the Payment Systems Regulator as a secure and cost-effective alternative to using card networks²⁶, but for a loan application the relevant point is simpler: it is a way of evidencing your budget quickly, under rules that require your consent.

How much checking you get depends on the loan

The depth of the assessment scales with what is at stake. The ombudsman's standard of "reasonable and proportionate" checks¹⁹ means a small, short loan will attract a lighter process than a mortgage, where the lender assesses the full range of your income, regular outgoings and any debt, and stress tests whether you could still afford the payments if interest rates rose¹⁵. A remortgage guide from the Homeowners Alliance notes that all potential borrowing is subject to affordability checks and credit status, and that the outcome depends on things like regular commitments, pay type, self employment, deposit, age and borrowing beyond retirement date, as well as each lender's own criteria²⁷.

For everyday unsecured loans, the typical process is the one described earlier: an income and expenditure discussion or form, verification against statements or open banking data, and a credit file search¹. For high cost credit such as payday loans, the checks are required before lending, before rolling over and before increasing the credit⁴, but the size of the loan means the verification is usually correspondingly lighter. For mortgages, the process is the most involved, and each lender weights the factors differently¹³.

The practical implication is that being turned down by one lender does not mean every lender will reach the same view. Different criteria, different weightings and different appetite for risk produce different answers to the same budget. It also means the evidence you need to hand differs: payslips for an employed applicant, accounts or tax returns for a self employed one, and bank statements or open banking permission for most applications. The pages on how to apply for a loan and how personal borrowing works cover the practical side of preparing an application.

Joint borrowers and guarantors

When two people borrow together, both are assessed. On joint mortgages, lenders run a credit check on each applicant before granting the mortgage, and if one party has a poor credit score it could impact the lender's decision²⁸. Which? also notes that most banks look at both partners' debt and income levels together when assessing a mortgage application where there is credit card debt²⁹. A joint application is one assessment of two finances, not two separate passes.

Guarantors are different, and the rules are stricter than many people expect. When a borrower applies for a guarantor loan, the lender must do an affordability check for both the main borrower and the guarantor¹. The guarantor must prove they can afford the repayments, based on their income, savings and any assets³⁰, and some lenders also ask for proof that the guarantor is working, proof of their income, or that the guarantor is a homeowner³¹. StepChange is blunt about what the arrangement rests on: the creditor agrees to lend the money based on the guarantor being able to repay the loan in full³⁰.

The Financial Ombudsman Service explains why the guarantor's check matters so much: when agreeing to the loan, lenders need to make sure you can afford the repayments without too much trouble, and they must be able to show what checks they did if the loan is later complained about as unaffordable³². In some cases the loan may even be secured against the guarantor's property³⁰. On guarantor mortgages, a parent or family member could use their savings or property to guarantee your loan²⁸, and lenders decide these cases individually, since the security a guarantor offers could offset the risk you pose as a customer, which can help where the barrier is a low income, a small or no deposit, a bad credit score, or little credit history³³. The dedicated pages on guarantor loans and joint borrowing go into these arrangements in detail.

Where the affordability rules do not apply

There are defined gaps, and most of them are in mortgages. Under MCOB 11.6.3R, the affordability assessment requirement does not apply to a replacement contract with no additional borrowing beyond financing a product or arrangement fee, or to a variation, provided there is no material change to the affordability terms³⁴. The Mortgage Charter went further for customers who are up to date with their payments: they can switch to a new mortgage deal at the end of their existing fixed rate without another affordability check, something the Charter says covers 97% of the mortgage market where customers are up to date, not seeking to borrow more, and not changing their repayment type or term³⁵. The 2026 Mortgage Charter likewise allows customers up to date with their payments to take up its one-off options without a new affordability check or any effect on their credit score³⁶.

Two further mortgage carve-outs are worth knowing. The requirements in MCOB 11.6.2R do not apply in relation to an interest roll-up mortgage, or to the type of lifetime mortgage described in MCOB 9.4.132AR³⁷. And where a remortgage involves no additional borrowing, the rules take a different shape entirely: under the FCA's remortgaging rules, the firm must not enter into the proposed regulated mortgage contract unless it is more affordable than the existing contract, measured by lower aggregate monthly payments plus fees, a lower typical monthly payment than in the twelve months before application, and a lower interest rate³⁸. The old FPC affordability test recommendation likewise did not apply to any remortgaging where there was no increase in the amount of borrowing, whether done by the same or a different lender³⁹.

Outside lending, the word "affordability check" is used loosely and the FCA rules do not apply at all. Landlords and letting agents check what they think you can afford by looking at your income and credit score⁴⁰, and Shelter describes these tenancy checks as looking at your income and what you spend to make sure you can afford the rent⁴¹. Those are private checks by landlords, not regulated creditworthiness assessments, and failing one has a different set of consequences: Shelter notes that if you fail an income, credit or reference check for a rental, you could offer to provide a guarantor⁴². That is a landlord's discretion, not a regulatory requirement.

Buy now pay later and affordability

Buy now pay later used to sit largely outside these rules, and that has changed. The regulation of BNPL brings lenders within the affordability framework: BNPL lenders are required to carry out affordability checks to ensure loans are affordable for consumers⁴³. StepChange describes what this means at the checkout: for anything you buy using BNPL, a lender will carry out a credit check to make sure you can afford the repayments, and they will do this for every purchase, even if it costs less than £50⁴⁴. That last point is the significant one. Small purchases that once went through without any check are now subject to the same assessment as any other credit.

The FCA's own consumer guidance on buy now pay later states the position directly: lenders need to check whether you can afford to repay before you take out an agreement¹⁰. The Scottish Government's consultation response had argued for exactly this standard, a reasonable assessment of ability to repay affordably without significantly affecting the consumer's wider financial situation¹⁶, and the rules that arrived reflect it.

For a consumer, the practical change is that BNPL is no longer invisible borrowing. Each agreement is assessed, and each one leaves the footprint a credit check leaves. If you use BNPL regularly, those checks now form part of the picture other lenders see when you apply for credit elsewhere. The pages on buy now pay later and how BNPL is regulated cover the rules and your rights in full.

If a check goes wrong or you are refused

Being refused a loan is not the end of the road, and being given a loan you could not afford is not the end of the argument. If a lender got the assessment wrong, the route to put it right starts with a complaint to the lender itself. The Financial Ombudsman Service, which deals with unaffordable lending complaints, explains that CONC requires a creditworthiness assessment considering the potential for the lending to adversely impact your financial situation, and that a lender must be able to show what checks it made⁹. The ombudsman's case studies show what happens when it cannot: loans found unaffordable have led to redress, with the borrower's budget re-examined against what the lender knew or should have verified¹⁷.

The steps from gathering evidence to a free, independent review by the ombudsman.

Two cautions apply before you complain. First, you must have been as truthful and accurate as possible during the affordability check, because wrong information can lead to your affordability complaint being refused¹. Second, the assessment is judged on what was reasonable at the time, not on hindsight: the ombudsman found in favour of a lender whose checks were verified with bank statements and a credit search, even though the borrower later struggled¹⁹. The narrow page on complaining about an unaffordable loan and the wider guide to complaining about a lender set out the process step by step.

If the problem is not a past loan but a refusal now, the options depend on why. A poor credit history is addressed on the poor credit borrowing page, and lenders may cover their risk by increasing the interest rates and the monthly payments¹⁴. A guarantor may be an option for some forms of credit, with the checks on both parties described above¹. Free, impartial help is available: StepChange and other debt charities offer advice on budgets and unaffordable credit, and the Financial Ombudsman Service is free to use if a complaint cannot be settled with the lender. If repayments on an existing loan have already become impossible, the guide to what to do if you can't repay a loan is the place to start, because the priority debts rule works in your favour there too: mortgage or rent, council tax, food and utilities come first⁵.