Understanding Affordability Checks for Loans
Are you thinking about getting a payday loan? If so, it’s essential for you to know what an affordability check is and why it matters to you.
An affordability check is a test run by a lender during your application process to see if you can easily afford to repay the loan amount you are requesting without putting you under undue financial strain.
Affordability Check Process
When you apply for a payday loan, you’ll be asked to share details about your monthly income and also your monthly expenses. The lender will use this income and expense information to calculate something called your Debt to Income Ratio (DTI). To pass an affordability check, most lenders want your DTI to be below 43% of your total income. If your DTI is higher than 43%, you fail the affordability check and your loan may be denied on the grounds that the loan would strain your finances and not improve your financial well-being.
Tips for Filling Out Your Income and Expenses Loan Application
When you fill out your loan application, be honest about how much money you make and what you spend. Include money from all your jobs and any benefits you get. For your expenses, only put down what you actually spend. For example, if your job helps pay for your travel, don’t include that in your travel costs.
Affordability Check with Bad Credit
Payday loan lenders look at your whole financial circumstances when doing an affordability check, not just your credit score. So, even if you’ve poor credit, you can still apply for a loan with most payday lenders. But if your credit score is bad you can expect to be charged higher interest rates.
The Importance of Affordability Checks
These checks are done to make sure you’re not taking on more debt than you can handle. It’s all about keeping you safe from financial stress. Plus, being honest on your application is super important. If you’re not, it could make things harder for you later when you need to borrow money again.
What to Do if you fail an affordability check
If you fail the affordability assessment and don’t get approved for a loan, think about whether you really need to borrow money right now. Sometimes being refused is a sign that you might need some help managing your money. There are places you can go for advice and help if you’re finding it tough to keep up with your bills and debts. You can contact the National Debt Line to assist you. You can speak with a real person over the phone to discuss your situation or access their debt help resources on their website.
The Bottom Line
When you’re thinking about a payday loan, remember how important the affordability check is. It’s there to help you make sure you can comfortably pay back the loan without putting yourself in a tough spot. And if things don’t work out with the loan this time, there’s always a chance to try again in 30 days if your circumstances change or you can check out some alternatives to payday loans.