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.

Alternative data is information used to assess credit that goes beyond traditional credit bureau records, such as Open Banking transactions, rental payments or account behaviour. It helps lenders assess people with thin or no credit history on how they actually manage money.

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.

Anti-money laundering (AML) is the set of laws, checks and controls that regulated firms use to stop criminals disguising illegal funds as legitimate. In lending it sits alongside Know Your Customer checks during onboarding and ongoing monitoring.

Application fraud is when someone applies for credit using false, exaggerated or stolen information, including stolen or synthetic identities. It drives losses and first-payment default, so lenders screen for it at onboarding with identity and data checks.

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.

Bacs is the UK payment system behind Direct Debit and Bacs Direct Credit. It processes payments on a three-day cycle and is the long-standing mechanism for collecting regular loan repayments and paying out funds in bulk.

Buy Now Pay Later (BNPL) is short-term credit offered at the point of purchase that lets customers pay in instalments, often interest-free. It has grown rapidly in the UK and is moving into the scope of FCA regulation, bringing affordability and Consumer Duty expectations with it.

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 County Court Judgment (CCJ) is a court order in England and Wales confirming that someone owes a debt they have not paid. CCJs appear on credit reports for six years and are a significant negative marker that lenders weigh in a credit decision.

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.

Credit risk is the risk that a borrower will not repay what they owe, on time or at all, leaving the lender with a loss. Managing it is the core job of lending: pricing, limits and decisions all flow from how much credit risk a lender is willing to take.

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.

Credit utilisation is how much of their available credit a borrower is using, usually shown as a percentage. High utilisation, for example being close to card limits, can signal financial stress and affects both credit scores and affordability judgements.

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.

A default happens when a borrower fails to meet the terms of their credit agreement, typically by missing payments for a sustained period. Lenders usually record a default after several missed payments, and it is reported to credit reference agencies.

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.

Faster Payments is the UK scheme that moves money between bank accounts in near real time, usually within seconds, around the clock. It underpins instant disbursements and Open Banking payments, and is far quicker than the multi-day Bacs cycle.

Financial resilience is a person's ability to withstand financial shocks, such as a drop in income or an unexpected bill, without serious hardship. Low resilience is one of the FCA's drivers of vulnerability and a key thing affordability assessments try to gauge.

First-payment default (FPD) is when a borrower misses the very first scheduled repayment on a new loan. A high FPD rate is a strong warning sign, often pointing to affordability problems or fraud that the original decision missed.

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.

Loan-to-value (LTV) is the size of a secured loan as a percentage of the value of the asset securing it, most commonly a property. A lower LTV means more of the asset's value is covered by the borrower's own funds, which reduces the lender's risk.

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.

Open Finance is the extension of Open Banking principles to a wider range of financial data, such as savings, investments, pensions and insurance, shared securely with consent. It promises an even fuller picture of a customer's finances for affordability and advice.

Payment orchestration is managing payments across multiple methods and providers through one layer, choosing the best route for each transaction. For lenders it means collecting repayments by Direct Debit, Open Banking or card, with retries and reconciliation handled centrally.

Risk-based pricing is setting the interest rate or terms a borrower is offered according to their assessed risk, so higher-risk borrowers pay more and lower-risk borrowers pay less. It lets lenders serve a wider range of customers while managing expected losses.

The Senior Managers and Certification Regime (SM&CR) is the FCA framework that makes individuals in regulated firms personally accountable for their areas of responsibility. It aims to improve conduct and governance by making clear who is responsible for what.

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.