How Redress Is Calculated
When an unaffordable lending complaint is upheld, the goal of redress is to put the borrower back, as far as money can, in the position they would have been in if the unaffordable lending had not happened. In practice that means a refund of interest and charges, plus 8% statutory interest, plus removal of credit-file damage. This page walks through the calculation, with examples for the main types of credit.
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The starting principle
The core idea, set out in many published Ombudsman decisions, is straightforward: the borrower should keep the principal they actually borrowed (because they had the use of that money) but should not have to pay interest, fees and charges on lending the lender should not have given. Those interest and charges are refunded, and 8% statutory interest is added on top to reflect the borrower’s loss of use of that money over time.
The components of redress
1. Refund of interest, fees and charges
Every interest payment, late fee, over-limit charge, default charge, and other charge applied to the unaffordable account from the point of unaffordability is refunded. For loans, this is usually the entire interest on the loan from the date of the unaffordable lending decision. For credit cards and catalogue accounts, it is the interest and charges from the relevant date — typically the date of an unaffordable opening, or the date an unaffordable credit limit increase took effect.
2. 8% simple statutory interest
On top of the refund, simple statutory interest is added at 8% per year, calculated from the date each charge was paid until the date of settlement. The 8% rate is the long-standing rate FOS applies for unaffordable lending redress, derived from Section 17 of the Judgments Act 1838. It is simple, not compound — applied to the principal of each refunded amount, not on previously-accrued interest.
The lender deducts basic-rate income tax (20%) from the 8% interest at source and pays it to HMRC. Higher-rate taxpayers have further liability, non-taxpayers may be able to reclaim the deducted tax.
3. Credit-file correction
Adverse credit-file entries linked to the unaffordable lending are removed. This typically includes default markers, arrears records, and any negative payment history connected to the upheld lending. Where the entire lending is unaffordable, the whole account record may be removed; where only later parts (later loans, later limit increases) are upheld, only the corresponding markers are corrected.
4. Application against outstanding balance
If you still owe the lender money on the unaffordable account, the refund is normally applied against the balance first. The cash element you receive is whatever remains after the balance is cleared. Where the refund is less than the balance, the refund reduces the balance and no cash is paid out.
Worked example: a personal loan
Suppose a £5,000 personal loan was found to be unaffordable. The borrower repaid the loan over three years, paying £1,800 in interest and one £35 late charge — total £1,835. The redress calculation:
- Refund of interest and charges: £1,835.
- 8% statutory interest, accruing on each payment from the date it was made — typically several hundred pounds across the period, depending on how long ago each payment was.
- Tax deducted at 20% from the 8% element only.
- Total refund: in the region of £2,000-£2,500 depending on the timing.
- No outstanding balance, so the full amount is paid in cash.
Worked example: a credit card with limit increases
Suppose a credit card was opened with a £500 limit, then increased to £1,500, £3,000 and £6,000 over several years. The complaint succeeds in respect of the increases to £3,000 and £6,000 — but not the original opening or the first increase. The calculation:
- Interest and charges that accrued on the portion of the balance above £1,500 from the date of the unaffordable increase are refunded.
- 8% statutory interest is added.
- Credit-file entries linked to the unaffordable portion of the balance are corrected.
- If the card still has an outstanding balance, the refund reduces the balance, with any surplus paid out.
The detailed apportionment between affordable and unaffordable portions of the balance can be complex. FOS uses standard methodologies for this, and lenders generally follow the same approach.
Worked example: payday loans in a sequence
Suppose ten payday loans were taken from the same lender over 18 months. The complaint succeeds for the seventh loan onwards, where the lender should have noticed the pattern and applied more scrutiny. The calculation:
- No refund on loans 1-6, which are found to have been adequately checked.
- Full refund of interest and charges on loans 7-10.
- 8% statutory interest from the date of each repayment.
- Total refund typically several hundred to several thousand pounds, depending on loan sizes.
Worked example: an overdraft
Suppose an overdraft has been used heavily for years, with the customer constantly at or near the limit. The complaint succeeds from the date the bank should have intervened under the repeat-use rules in CONC 5D — typically several years ago. The calculation:
- Refund of overdraft interest and unarranged charges from the relevant intervention point onwards.
- 8% statutory interest on top.
- Credit-file correction for any markers linked to the unaffordable overdraft use.
- Where the account remains overdrawn, the refund applies against the balance first.
What is not included
Redress generally does not include:
- A refund of the principal borrowed — you had the use of the money, so you keep it (or remain liable for it if not yet repaid).
- Compensation for distress and inconvenience as a matter of course — modest awards are sometimes made, but typically only in cases involving particular failings or vulnerability.
- Consequential losses — for example, the cost of higher-rate alternative borrowing you took out elsewhere because of the original lending. These are not normally awarded by FOS for affordability cases.
- Punitive damages — UK consumer redress does not include punitive elements.
Distress and inconvenience awards
FOS occasionally adds a distress and inconvenience award where the lender’s conduct caused particular harm — typical amounts are £100-£500. Larger awards are uncommon and usually reserved for cases involving sustained mishandling, vulnerability that was not properly recognised, or repeated failures to engage with the complaint.
Related guides
- The 8% statutory interest explained
- What if you still owe the lender money?
- Will a claim repair my credit file?
- Is unaffordable lending redress taxable?
- What happens after you make a claim
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