Affordability Checks: When Finance Companies Get It Wrong

How inadequate affordability assessments can invalidate your finance agreement. What lenders should check and your rights when they don't.

Affordability checks are the finance company's legal obligation to ensure you can afford the credit they're offering. When they fail to conduct proper checks, the entire agreement can be challenged as unfair under Section 140A of the Consumer Credit Act.

What is an Affordability Check?

Before approving credit, lenders must assess whether you can afford the repayments without experiencing financial difficulty. This isn't just a credit score check - it's a detailed evaluation of your income, expenditure, and financial commitments.

Legal Requirements

The Financial Conduct Authority (FCA) requires lenders to:

Obtain sufficient information about your income and expenditure
Take reasonable steps to verify that information
Consider your existing financial commitments
Assess whether you can afford repayments without hardship
Consider your vulnerability and financial literacy

What Lenders Should Check

Income Verification

Employment: Payslips, employment contract, P60
Self-employment: Tax returns, accounts, bank statements
Benefits: Award letters, bank statements showing payments
Pension: Pension statements, bank statements
Other income: Rental income, investments, maintenance

Expenditure Assessment

Housing costs: Rent or mortgage payments
Utilities: Gas, electric, water, council tax
Food and essentials: Realistic living costs
Transport: Car finance, fuel, insurance, public transport
Childcare: If applicable
Other commitments: Phone, broadband, subscriptions

Existing Credit Commitments

Credit cards (minimum payments)
Loans (personal, car, student)
Mortgages or secured loans
Hire purchase agreements
Overdrafts
Buy now, pay later arrangements

Credit File Check

Existing debts not disclosed
Recent credit applications
Payment history
County Court Judgments (CCJs)
Defaults or bankruptcies

⚠️ The 25% Rule

While not a legal requirement, the Ombudsman often uses a rule of thumb: if credit repayments exceed 25% of your disposable income (income minus essential expenditure), the lending may be unaffordable.

Common Affordability Failures

1. No Verification of Income

Accepting self-declared income without proof
Not requesting payslips or bank statements
Failing to verify employment
Approving based on credit score alone

2. Ignoring Existing Debts

Not checking credit file for other commitments
Failing to ask about existing loans
Ignoring mortgage or rent payments
Not considering total debt burden

3. Unrealistic Expenditure Assumptions

Using statistical averages instead of actual costs
Underestimating essential living expenses
Not considering household size
Ignoring regional cost variations

4. Lending to Vulnerable Customers

Approving credit for elderly customers on fixed pensions
Lending to those with mental health issues without safeguards
Not considering low financial literacy
Ignoring signs of financial difficulty

5. Automated Decisions Without Human Review

Relying solely on credit scoring algorithms
No manual review of borderline cases
Failing to consider individual circumstances
Not questioning obvious red flags

Red Flags of Poor Affordability Checks

You may have a claim if:

✓ Approval within minutes without requesting documents
✓ No request for payslips, bank statements, or proof of income
✓ Approval despite being unemployed or on benefits only
✓ Monthly payments exceed 25% of your disposable income
✓ You were already in financial difficulty when approved
✓ You had recent defaults, CCJs, or debt management plans
✓ The lender didn't ask about other credit commitments
✓ You were approved despite declaring low income
✓ The application process took less than 10 minutes

Real Case Examples

Case 1: Pensioner - £15,000 Debt Written Off

Mrs. K, 68, pension income £950/month. Approved for £25,000 solar panel finance with £420/month payments. No verification of income, no discussion of affordability. Ombudsman: remaining £15,000 debt cancelled + £800 compensation.

Case 2: Benefits Recipient - Full Refund

Mr. L, receiving £1,200/month Universal Credit. Approved for £18,000 kitchen finance (£380/month). Finance company claimed they verified income but couldn't produce evidence. Ombudsman: full refund of £8,400 paid + remaining debt cancelled.

Case 3: Multiple Debts - £22,000 Compensation

Ms. M had existing debts of £35,000 when approved for £12,000 conservatory finance. Credit file clearly showed financial difficulty. Ombudsman: full refund of all payments (£9,500) + remaining debt cancelled (£6,200) + £1,200 distress = £16,900 total.

How to Prove Affordability Failure

Evidence to Gather

Bank statements: 3-6 months before the agreement showing income and expenditure
Income proof: Payslips, benefit letters, pension statements
Credit report: From the time of the agreement (request from Experian, Equifax, TransUnion)
Other credit agreements: Showing existing commitments
Application documents: What information you provided
Correspondence: Any discussion about affordability

Calculate Your Affordability

Create a simple budget showing:

Monthly income: £_____
Essential expenditure: £_____
Existing credit commitments: £_____
Disposable income: £_____
New credit payment: £_____
Remaining after payment: £_____ (if negative or very low, unaffordable)

What to Request from the Finance Company

Under Section 77/78 Consumer Credit Act, request:

Copy of your credit agreement
Copy of your application form
All affordability assessment documents
Credit file they obtained at the time
Notes from any affordability discussions
Their lending criteria and affordability policy

They must provide this within 12 working days for £1 fee (or free).

Making Your Complaint

Key Points to Include

"The credit relationship is unfair under Section 140A Consumer Credit Act 1974"
"You failed to conduct adequate affordability checks as required by FCA CONC rules"
Specific failures (no income verification, ignored debts, etc.)
Your actual financial position at the time
Evidence the payments were unaffordable
Impact on you (financial hardship, stress, credit damage)

Were You Approved for Unaffordable Credit?

We can help you prove affordability failures and draft a compelling complaint.

Start Your Complaint

Typical Outcomes

Successful affordability complaints result in:

Debt cancellation: Remaining balance written off
Refund of payments: All or partial refund of money paid
Interest refund: All interest charges returned
Compensation: £300-£1,500 for distress
Credit file correction: Removal of adverse marks

Time Limits

6 years: From the date of the agreement to make a claim
3 years: From when you discovered the affordability failure
6 months: To escalate to Ombudsman after final response

Frequently Asked Questions

What if I lied on my application?

The lender still had a duty to verify the information. If they approved you without proper checks, they share responsibility even if you overstated your income.

Can I complain if I've been making payments successfully?

Yes. Just because you've managed to pay doesn't mean the credit was affordable. If you've had to cut essential spending, borrow elsewhere, or experience hardship, it was unaffordable.

What if I could technically afford it but it was still irresponsible lending?

The test isn't just mathematical affordability - it's whether you can afford it "without experiencing financial difficulty." This includes considering your vulnerability and whether the credit is sustainable long-term.

Inadequate affordability checks are one of the most common and successful grounds for finance complaints. If you were approved for credit you couldn't afford, you have strong legal protections.