Ability to Pay Definition

The phrase "ability to pay" is a financial term indicating a borrower’s financial ability to repay a debt, such as a personal loan for debt consolidation or their mortgage. When issuing a loan, the finance company, lender or banking institution will perform some type of review to determine the prospective borrower’s "ability to pay" or in other words, financial ability to make timely and adequate loan repayments.

If, in the process of underwriting the loan, the prospective borrower’s "ability to pay" is determined to not be sufficient, the financial institution will either decline to offer the loan or will sometimes offer the loan at an increased rate or with different terms.

Also, during bankruptcy proceedings, creditors may seek to establish the bankrupt party’s "ability to pay" on all or some of the contested debt.