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Credit Score Basics > How much do you need to earn to pass an affordability check?
How much do you need to earn to pass an affordability check?
Before giving you a loan, banks and lenders in the UK need to check if you can afford to pay it back. This is called an affordability check. Your income is the main thing they look at, but they also consider other money you owe and your regular expenses.
What is an affordability check?
An affordability check looks at how much money you make and how much you spend each month. The lender runs this check because they want to see if you will have enough money left over to make the new loan payments on top of your other bills and costs.
During the check, they will ask about:
- Your total household income from jobs, benefits, self-employment, etc.
- Regular costs like rent, mortgage, utilities, food, and other basics.
- Any other debt payments like credit cards, existing loans, or another mortgage.
- How many people depend on your income (children, spouse, elderly parents).
They use this information to calculate if your income covers your expenses with some money left over for the new loan repayments.
How much income do I need?
There is no fixed income amount of income to pass an affordability check, as it depends on your individual situation.
However, most UK lenders generally want:
- Your debt payments (including the new loan) to be less than half your income.
- And for you to have enough income left after expenses to afford the loan repayments.
For example, if you apply for a £10,000 loan over 5 years, you may need around £2,600 per year in extra income to make those payments on top of your existing costs.
The more income you have and the less debt you already owe, the higher the loan amount you can likely get approved for.
What if my income is too low?
If you don’t pass an affordability check, you could still get approved for a loan, but you might need to change something about your application. Here are the main strategies you could use:
- You can have someone like a parent or close friend act as a guarantor who agrees to pay the loan if you can't. Guarantor requirements usually include having a good credit score and owning a home or having a high income. You must be careful, though, not to strain the relationship, as your guarantor will have to pay the loan if you default. This will lower both your credit scores.
- You could also apply for the loan or mortgage jointly with a spouse or partner who has additional income. This can help you get approved by increasing your combined affordability.
- You can also try to improve your approval chances by getting a second job, paying off debts, or reducing household expenses. Easier said than done, perhaps.
Is an affordability check more important than a credit check?
Both are important, in different ways. Besides income, lenders will also look closely at your credit score and credit report history when deciding whether to approve your loan or not.
However, a credit check is more important when it comes to the terms of your loan. While the affordability check simply tells the lender if you can afford to pay back the debt or not, a credit check tells them how risky you are.
Because of this, a poor credit score could mean:
- You getting offered a higher interest rate on the loan;
- You getting approved for a smaller loan amount;
- Or stricter income and debt requirements.
For large loans like mortgages, this can have a dramatic impact.
Take this example: let’s assume you’re taking a typical 30-year mortgage for a property worth £500,000. You put down a deposit of £100,000. Since a jump from one credit score band to another can mean as much as 1% increase in interest rate, you could be looking at over £90,000 paid on top of what someone with a good credit score would pay.
In other words, a better credit score can help you both save money and pass an affordability check because now you’ll be asked to pay a lower bill since your interest is not as high.
This is why it’s so important to work on your credit score before applying for a loan.
One of the ways to improve your score is to download a credit-building app like Wollit.
Wollit works by reporting a fixed fee monthly subscription as a loan repayment to the credit reference agencies (Experian, Equifax, and TransUnion).
Eventually, this will help you improve your credit score so you can pay less in interest, making the loan more affordable and without you needing to go looking for a guarantor or a second job.
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Terms apply. Results may vary. Improvements to your credit score are not guaranteed. Wollit Credit Builder plans are unregulated.