What is Affordability?
Risk
Affordability is how much a person can put toward loan installments without compromising essential expenses. It is estimated from their income and existing obligations, and it defines the maximum reasonable amount to grant.
Why it matters
Willingness to pay is measured with history; ability, with numbers. A customer may want to pay and be unable to, and there delinquency says nothing about their behavior and everything about a badly calibrated amount.
When a customer holds debt at several institutions, the real burden is only visible by adding up all their obligations, not just yours.
- Defines the maximum reasonable amount, not just approval.
- Must account for debt at other institutions.
- Key to avoiding payment shock when raising limits.
Common questions
Why look at debt at other institutions?+
Because the customer pays every installment out of the same income. Assessing only your own exposure overestimates their capacity and is a typical cause of over-indebtedness.
Related terms
Alternative data
Alternative data are non-traditional information sources —transactional behavior, open banking, device data, telco or utilities— that complement the credit bureau to assess applicants with little or no history. They make it possible to lend to populations traditional scoring can't reach.
Champion/Challenger testing
Champion/Challenger is a technique for improving credit policies by routing a share of traffic to an alternative policy (the challenger) and comparing its performance against the one in production (the champion). It lets teams validate changes on real data at controlled risk before adopting them.
Credit scoring
Credit scoring is the technique of assigning an applicant a score that estimates their likelihood of repayment, combining internal data with external sources such as credit bureaus, behavioural data and alternative data. That score feeds the lending decision alongside policy rules.
Back to the full glossary.
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