Secured Loan Affordability Assessment
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in secured loans
A key factor in whether your secured loan is likely to be approved or declined is the lender affordability assessment. Of course, nobody would want to take on a loan unless they can afford it, but unfortunately, circumstances sometimes change and previously affordable loans can become unaffordable.
In this guide, we’ll break down how secured loan affordability assessments work, what documents you’ll need to provide and some other key tips. Read on to find out more.
What we cover in this article:
- What is a secured loan affordability assessment?
- Why is affordability such a key issue for secured loan lenders?
- How can I prove affordability?
- What information should I include in an income and expenditure assessment?
- What information should I include in an income and expenditure assessment?
- What other factors can impact an affordability assessment?
- Can I appeal if I fail an affordability assessment?
- How can I make sure I pass a secured loan affordability assessment?
What is a secured loan affordability assessment?
A secured loan affordability assessment is the method used by secured loan lenders to decide whether a secured loan application is considered affordable. It is a key element of the secured loan application process and must be passed in order to take out this type of loan.
The actual process of calculating affordability isn’t a very interactive process, instead, it generally takes place behind closed doors by the lender’s underwriting team.
Why is affordability such a key issue for secured loan lenders?
Affordability is a key issue for secured loan lenders because they want to make sure that you can keep up the repayments on your loan. How affordable the loan is represents a big part of how likely you are to keep up repayments, alongside your credit history.
On top of this, lenders have a duty of care to ensure that they practice responsible lending. Clearly, agreeing loans that are clearly too expensive for a borrower is not a responsible thing to do.
Finally, a lender generally wants to issue a loan, earn interest each month and have the loan repaid over time. If payments are missed, although the lender may be able to get their funds back by repossessing and selling your property, this is not an ideal situation for anybody and should never be the expected outcome.
How can I prove affordability?
You can prove affordability by providing the lender with the information they request to assess affordability. This is usually the following:
- Proof of income (payslips for employed borrowers, HMRC tax documents for self-employed)
- Proof of benefit income
- Bank statements
- Mortgage statements
- Proof of pension income (where applicable)
- Details of any expected changes in income (for example, proof of an upcoming pay rise)
- A detailed income and expenditure summary (the lender will usually provide a template)
Of course, this will always vary slightly depending on the lender you’ll be applying to, but this will cover most scenarios.
What information should I include in an income and expenditure assessment?
You should include all earnings and outgoings in an income and expenditure assessment. As mentioned above, most lenders have their own template that will cover all bases, breaking down each area of income and spending.
If you fail to provide details of a certain outgoing to a lender, they are very likely to notice when they check your bank statements during the underwriting process. This will lead to additional questions and can damage the lender’s trust in your application.
What other factors can impact an affordability assessment?
On top of the standard affordability assessment, secured loan lenders check your other regular outgoings. For this reason, if you spend a lot of money each month on things such as gambling, socialising (to an extreme level) or subscriptions, they may reduce, or even scupper your borrowing potential.
High and regular spending on gambling will often cause alarm amongst lenders and can often lead to a declined application.
Can I appeal if I fail an affordability assessment?
Yes, most lenders allow you to appeal a declined secured loan application, however, you’re unlikely to be successful unless there has been an error.
Lenders operate based on set rules of what is or is not acceptable. When it comes to assessing affordability, the rules tend to be strict and not open to interpretation.
If your application is declined based on affordability, you’re much more likely to be approved with a different lender than by appealing the decision with your current one.
How can I make sure I pass a secured loan affordability assessment?
The best way to make sure you pass the affordability assessment is to check whether you meet the lender’s criteria before applying.
As an experienced secured loan broker, we do this for all our applicants to ensure they don’t waste time on failed applications. Submitting multiple applications that are ultimately declined can have a negative impact on your credit file, make borrowing more difficult and result in significant delays in getting your loan.
Keep reading – Should I get a secured loan or remortgage? or 10 reasons to consider a secured loan
