What is Unaffordable Lending?
Unaffordable lending is credit — a loan, a credit card, an overdraft, a catalogue account or any other regulated credit product — that the borrower cannot realistically afford to repay sustainably without falling into financial difficulty. The borrower might still be making payments, but only by borrowing again, missing essential bills, or going without basics. The FCA’s rules require lenders to spot this kind of strain before they grant the credit, not after.
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The FCA’s definition in plain English
The relevant rule is CONC 5.2A in the FCA Handbook. It says a lender must carry out a “reasonable and proportionate” assessment of whether the customer can afford to meet their repayments. Three words in that sentence do most of the work:
- Reasonable — the lender must actually consider whether the borrower can pay, not just whether the borrower has agreed to pay.
- Proportionate — the depth of the check should match the size of the credit, the cost of repayments, the borrower’s known circumstances, and any signs of vulnerability.
- Sustainably — repayments must be possible without significant adverse impact on the borrower’s wider financial situation. CONC defines a sustainable repayment as one made without borrowing again to do it, and without missing other essential payments.
A loan can be repaid in full and on time and still have been unaffordable when it was given, if the borrower could only manage by skipping bills or taking out further credit elsewhere. That is the test the Financial Ombudsman applies.
Common signs of unaffordable lending
When the Financial Ombudsman looks at a complaint, certain patterns recur — they are not proof of unaffordability on their own, but they are the kind of evidence that supports a complaint:
- Credit was given despite the borrower already being in arrears, defaulting, or showing distress on their credit file.
- Income, expenditure or other commitments were not properly verified, or were taken at face value despite obvious gaps.
- Credit limits were repeatedly increased without a fresh affordability check.
- The borrower could only afford to make minimum payments for years, with the balance never meaningfully reducing.
- Repayments left the borrower unable to meet essential living costs — rent, utilities, food, council tax.
- The borrower was already using payday loans, multiple overdrafts or other high-cost credit when fresh lending was extended.
- Vulnerability indicators — bereavement, illness, gambling activity on bank statements — were visible but not acted on.
Unaffordable lending is not the same as mis-selling
Mis-selling complaints are about how a product was sold — for example, a customer being persuaded to take a product unsuited to their needs, or having key information withheld. Unaffordable lending complaints are about whether the lender should have given the credit at all, given what they knew or should have known about the borrower’s ability to repay it.
In practice the two can overlap, and a single case can include both elements. But the affordability test is its own thing, with its own rules in CONC and its own well-developed FOS approach.
What you might be entitled to
If a complaint succeeds, the typical remedy is to put the borrower back in the position they would have been in if the credit had not been given — meaning a refund of all interest, fees and charges paid on the unaffordable lending, plus 8% simple statutory interest on top. Adverse credit-file entries linked to the unaffordable lending are usually removed too. If a balance is still outstanding, the refund is normally applied against it first.
Related guides
- Irresponsible vs unaffordable lending
- What affordability checks should a lender carry out?
- The CONC rules on affordability — a plain-English guide
- Do I have an unaffordable lending claim?
- How the Financial Ombudsman handles unaffordable lending complaints
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