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Affordability Checks v Credit Checks - What's the difference?

There is a huge difference between credit checks and affordability difference. For example, there is no regulation that says a lender has to perform a credit check. There are regulations that state that lenders need to perform affordability checks. So what is the difference between the two? 

 

Most people would fail credit checks, but PASS affordability checks

Affordability checks calculate how much money you have coming into your household each month and then deduct how much money you have going out. If you have more coming in than you do going out (after the loan repayment is included in outgoings), you would then pass the affordability check. 

 

Benefits of Affordability Checks

The positive side of using affordability checks is that they provide a much more recent indication of the applicants ability to comfortably make repayments. The previous system of credit checks meant that lenders would have to look at information from as long ago as 6 years. That doesn't really make any sense in modern society where things can change from month to month.

It often meant good costumers failing checks because of their history even though they could afford the loan repayments. But more dangerously, it meant customers who really couldn't afford a loan were being given one because 3-4 years ago they had a good history. Something needed to change.

The Financial Conduct Authority has now made affordability checks compulsory, in a way they have thrown their full weight behind the new method because they also feel it works better. Some may remember that Wonga had to repay around £200 million to its customers for not performing Affordability checks back in 2014/15. This is why this site doesn't perform credit checks on applications.

 

What is checked?

We do need to perform some checks. These include ID checks, we need to make sure we are lending to the right person. That the applicant has lived at the address they claim to. Finally we need to check that the applicants income is what they claim it is. 

We can do all this automatically and without the need for paperwork. Checks will be done as soon as the application form has been submitted and will usually take about 90 seconds or less.