UK lending, credit and payments, explained

An affordability assessment is a lender's check of whether a borrower can repay a loan sustainably out of their disposable income, without undue difficulty. It weighs verified income against committed and essential outgoings, rather than only asking whether they are creditworthy in principle.

The Annual Percentage Rate (APR) is the yearly cost of borrowing shown as a percentage, including interest and most compulsory fees. It is designed to let borrowers compare credit products on a like-for-like basis. UK regulated lenders must show a representative APR in advertising.

Arrears are missed or partial payments that a borrower owes but has not paid on time. An account 'in arrears' has fallen behind its contractual schedule. Lenders track arrears by stage (for example one, two or three-plus payments behind) to prioritise support and collections.

Collections is the function that recovers money owed when borrowers fall behind. Good collections is customer-centric: it contacts people early, understands why they have missed a payment, and agrees affordable, sustainable arrangements rather than applying pressure.

Confirmation of Payee (CoP) is a UK name-checking service that verifies whether the name on a bank account matches the account number and sort code before a payment is sent. It is designed to cut misdirected payments and authorised push payment (APP) fraud.

The Consumer Duty is an FCA standard, in force from 31 July 2023, requiring regulated firms to deliver good outcomes for retail customers. It sets a consumer principle plus four outcomes: products and services, price and value, consumer understanding, and consumer support.

A credit decisioning engine is the software that takes applicant and data-source inputs and returns a lending decision, typically accept, refer or decline, by applying rules, scorecards and policy. It centralises how a lender decides, so decisions are consistent, fast and explainable.

A credit reference agency (CRA) collects data on how people and businesses borrow and repay, and provides it to lenders as credit reports and scores. The three main UK CRAs are Experian, Equifax and TransUnion. Lenders use CRA data to help assess credit risk.

A credit scorecard is a model that assigns points to applicant characteristics, such as income, credit history and affordability signals, and sums them into a score that predicts the likelihood of a good or bad outcome. Lenders set cut-offs on the score to accept, refer or decline.

A creditworthiness assessment judges the risk that a borrower will not repay, combining credit risk (likelihood of default) with affordability (whether repayments are sustainable). UK rules require lenders to assess both before agreeing most regulated credit.

The debt-to-income ratio (DTI) compares a borrower's total debt repayments to their income, usually as a percentage. It is a quick affordability signal: a higher ratio means more of someone's income is already committed to debt, leaving less headroom for new borrowing.

Direct Debit is a UK payment method, run on the Bacs system, where a customer authorises an organisation to collect varying amounts from their bank account on agreed dates. It is protected by the Direct Debit Guarantee and is a mainstay of loan repayment collection.

Forbearance is the support a lender offers a borrower in financial difficulty, such as reduced or paused payments, a repayment plan, or extending the term. UK rules expect firms to consider forbearance before enforcement and to tailor it to the customer's circumstances.

Identity verification (IDV) is the process of confirming that a person is who they claim to be, using data checks, documents or biometrics. In lending it prevents application fraud and impersonation and is a core part of KYC and onboarding.

Income verification is the process of confirming a borrower's stated income from reliable evidence, rather than taking it at face value. Lenders increasingly verify income directly from bank transaction data via Open Banking, which categorises salary, benefits and other regular credits.

Know Your Customer (KYC) is the set of checks a regulated firm performs to verify a customer's identity and assess risk before and during a business relationship. It underpins anti-money-laundering (AML) compliance and helps prevent fraud and financial crime.

Loan origination is the end-to-end process of taking a borrower from application to funded loan: capturing the application, verifying identity and income, assessing creditworthiness and affordability, making a decision, and disbursing funds. It is the front end of the lending lifecycle.

Open Banking is a UK framework that lets consumers and businesses securely share their bank transaction data, with consent, through regulated APIs. Lenders use it to verify income and affordability from real account data and to take account-to-account payments.

Straight-through processing (STP) is handling a transaction end to end with no manual intervention. In lending, an application that is captured, assessed, decided and funded automatically has been processed straight through. A higher STP rate means lower cost and faster decisions.

A thin credit file is a credit report with little or no borrowing history, which makes an applicant hard to score with traditional bureau data. It is common among young adults, recent migrants and people who have mostly used cash or debit.

Underwriting is the process of assessing a lending application and deciding whether, and on what terms, to lend. It can be automated (rules and scorecards decide), manual (an underwriter reviews the case), or a blend where the system handles the routine and refers complex cases to a human.

Variable Recurring Payments (VRP) are Open Banking payments that let a customer authorise a provider to move money from their account automatically within agreed limits. Unlike Direct Debit, VRP uses real-time rails and gives the payer granular control over amount and frequency caps.

In FCA terms, a vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate care. Drivers include poor health, a major life event, low financial resilience and low capability.