Affordability Assessments

Why Affordability Assessments Exist

Affordability checks help prevent borrowers from taking on loans they cannot manage.

Without proper affordability assessments, borrowers could easily accumulate debt that becomes difficult or impossible to repay.

Responsible lenders must take reasonable steps to confirm that loan repayments are sustainable based on the borrower’s financial situation.

What Lenders Typically Review

To assess affordability, lenders look at several aspects of a borrower’s financial position.

Income

Lenders usually verify income sources such as:

• Employment income
• Self employment income
• Government payments
• Other regular financial support

This helps confirm the borrower has consistent funds available to meet repayment obligations.

Living Expenses

Borrowers are normally asked about regular living costs, including:

• Housing costs
• Utilities
• Food and groceries
• Transport expenses
• Insurance payments
• Childcare or family commitments

These expenses help lenders estimate the borrower’s available income after essential costs.

Existing Debts

Lenders also consider any existing credit commitments, such as:

• Personal loans
• Credit card balances
• Buy now pay later agreements
• Vehicle finance

Existing repayments reduce the amount of income available for new loan repayments.

Financial Stability

Responsible lenders may also consider broader factors such as:

• Employment stability
• Length of time at current address
• Past repayment history

These indicators help lenders understand the borrower’s financial stability.

Why Lenders Ask for Documentation

Borrowers are often asked to provide documents such as:

• Bank statements
• Payslips
• Identification
• Proof of address

These documents help lenders verify the information provided during the application process.

While this may seem detailed, it is required to ensure responsible lending practices.

What Happens If a Loan Is Not Affordable

If a lender determines that a loan may cause financial hardship, they may:

• Decline the application
• Offer a smaller loan amount
• Suggest a longer repayment term
• Recommend waiting until financial circumstances improve

Although this may feel frustrating at the time, it protects borrowers from entering unsustainable debt.

Responsible Lending Benefits Borrowers

Affordability assessments may involve extra steps, but they serve an important purpose.

They help ensure that borrowers:

• Understand their financial commitments
• Avoid excessive debt
• Maintain financial stability

For responsible lenders, affordability assessments are a fundamental part of providing fair and sustainable credit.

How to Spot Predatory or Irresponsible Lenders

While New Zealand has strong lending regulations, borrowers should still be aware of lenders who operate outside responsible lending practices.

Predatory lending occurs when a lender provides credit in a way that takes advantage of borrowers or places them in unsustainable financial situations.

Understanding the warning signs can help borrowers avoid unnecessary financial risk.

Warning Signs of an Irresponsible Lender

Certain behaviours may indicate that a lender is not following responsible lending principles.

No Affordability Checks

If a lender offers a loan without asking about income, expenses or existing debts, this can be a warning sign.

Responsible lenders must assess whether borrowers can afford repayments.

Pressure to Sign Quickly

Borrowers should never feel rushed into accepting a loan agreement.

Predatory lenders may attempt to pressure borrowers into signing before they fully understand the terms.

Responsible lenders allow borrowers time to review documents and ask questions.

Unclear Fees and Costs

If loan costs are difficult to understand or hidden in complex wording, borrowers should proceed with caution.

Responsible lenders clearly disclose:

• Interest rates
• Fees
• Repayment schedules
• Total loan costs

Transparency is a key principle of responsible lending.

Extremely High Interest or Penalty Fees

Excessive interest rates or penalty fees may indicate a loan structure designed to generate profit from borrower hardship.

Borrowers should carefully review the full cost of borrowing before accepting any loan agreement.

Lack of Regulatory Transparency

Legitimate lenders in New Zealand should be:

• Registered on the Financial Service Providers Register
• Members of an approved dispute resolution scheme
• Operating within the CCCFA framework

If a lender cannot clearly demonstrate these credentials, borrowers should be cautious.

What Borrowers Should Do if Something Feels Wrong

If a loan offer feels unfair or unclear, borrowers should consider:

• Asking the lender for clarification
• Seeking independent financial advice
• Comparing offers from multiple lenders
• Reviewing the lender’s regulatory status

Taking time to review these factors can prevent costly mistakes.

Responsible Lending Protects Borrowers

New Zealand’s lending framework is designed to promote fair and transparent lending practices.

By understanding how responsible lending works and recognising warning signs of predatory lenders, borrowers can make safer financial decisions.

Choosing a lender that operates within New Zealand’s regulatory framework helps ensure that credit is structured responsibly and sustainably.