Closing the data gap for affordability assessment

3 min read|Published December 06, 2022
Closing the data gap for affordability assessment

An accurate picture of creditworthiness is always a must in lending, but it couldn’t be more paramount than in today’s macroeconomic climate. Lenders should act responsibly to protect consumers from taking out loans they can’t afford. Here’s a breakdown of affordability assessment today and why it’s central to the future of lending.

TL;DR – Quick summary
  • Current events and a precarious economic climate have had an impact on lending, particularly in relation to conducting quality affordability assessment of loan applicants.  

  • This article details affordability versus credit checks, essential steps in the lending process and why up-to-date creditworthiness data matters to lenders.

  • Consumer lending reaps the benefits of open banking in affordability, verification and more – download our report for a full analysis.

TL;DR – Quick summary
  • Current events and a precarious economic climate have had an impact on lending, particularly in relation to conducting quality affordability assessment of loan applicants.  

  • This article details affordability versus credit checks, essential steps in the lending process and why up-to-date creditworthiness data matters to lenders.

  • Consumer lending reaps the benefits of open banking in affordability, verification and more – download our report for a full analysis.

The rise in inflation and interest rates has pushed many economies into a cost-of-living crisis, made worse by the fact that real wage growth in countries such as the UK is at its lowest in 21 years. Meanwhile, digital tools made it easier to process large amounts of loan applications online. They have, however, also led to more loans being granted to people who can’t afford them.

As a result, most EU regulators have found themselves attempting to protect consumers from unsupervised lending. Key to moving forward is improving lenders’ credit assessments, namely, optimising how they assess the affordability of applicants.

What is an affordability check?

A common misconception around affordability checks is that they’re equivalent to credit checks. Credit checks are retrospective in nature. Looking backward, they evaluate a customer’s credit history and record of meeting debt obligations, then assume that this is indicative of the future. An affordability check, on the other hand, is about looking forward. It considers the potential of credit to adversely impact the customer’s financial situation in different scenarios. What could happen if interest rates or the cost of living rise? Or if their source of income changes? At the end of the day, what affordability checks take into consideration above all else is the customer’s financial wellbeing.

Our research shows that the most vital steps in the lending process are to validate and verify income followed by assessing overall affordability. In contrast, profiling customers and gathering behavioural insights are considered least critical to the lending process. 

Steps in the lending process ranked by level of importance

Closing the data gap for affordability assessment

Q: How important are the following steps for the lending process?

Base: All who provide credit or loans (n=364)

Source: Tink, 2022

Why open banking matters to lending

Open banking offers the potential to address many of the problems experienced by lenders, unlocking a whole new era of consumer lending where creditworthiness assessment data is always up to date, accurate, and relevant. This also means lenders are better placed to meet their moral obligation to protect vulnerable consumers – while further minimising the occurrence of non-performing loans and boosting revenue.

Keen to delve even deeper into the world of consumer lending? Our latest report – ‘Lending unlocked; a new era of credit’ – covers everything you need to know about the future of credit lending. From the role played by open banking to in-depth analysis of the effects of current events, it’s a comprehensive breakdown complete with telling interviews.

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