Lecture series
Affordability: what a borrower can repay
Whether a borrower will repay and whether the borrower can afford to repay are different questions. This course explains what affordability means, how income and essential expenses are measured, how debt-service ratios and residual income work, how buffers and stress tests protect both sides, how the rules differ between markets, and how affordability is built into the lending decision. Six lessons.
6 of 6 lessons published. Lesson 1 is free to read.
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- 01What affordability means: repaying without hardshipA lender that checks only whether a loan will be repaid can miss a borrower who repays by skipping essentials or borrowing elsewhere. Affordability asks a second question: can this borrower meet the repayments out of income, on time, without serious harm to the household's finances?
- 02Measuring income and essential expensesEvery affordability check rests on two numbers: the income the borrower can count on, and the spending the household cannot avoid. Both are harder to measure than they look, especially where many people earn irregular or informal incomes.
- 03Debt-service ratios: how they are calculated and what they missThe debt-service ratio is the most widely used affordability measure: the share of income that goes to debt repayments. It is simple to compute and easy to compare, but only if everyone agrees on what goes into the top and the bottom of the fraction, and even then it leaves important things out.
- 04Residual income, buffers and stress testsA ratio says what share of income goes to debt; residual income says how much money is left to live on. Buffers and stress tests then ask whether that amount would survive a higher interest rate or a fall in income. Together they turn a snapshot into a judgement about the life of the loan.
- 05Affordability rules compared: duties, ratio limits and how markets differMarkets write affordability into their rules in two broad ways: a duty on the lender to assess whether the borrower can repay, and numerical limits on ratios such as repayments or loans relative to income. The same applicant can pass under one design and fail under another, so the details matter as much as the headline number.
- 06Putting affordability into the lending decision: amount, term, limits and reviewAffordability is useful only if it changes what the lender offers. The measures of the course become decisions: the largest amount a household can carry, the term, the limit on a credit line, what to watch after the loan is made, and the records and reviews that keep the process honest.
Quiz and certificate 9 questions; those on lesson 1 are free to try. Read every published lesson and score 80% or more for a certificate of completion.
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