“How big of a loan can I get?”
When it comes to getting a loan for things like a car or home, the guidelines on what’s affordable to borrow are relatively clear.
A good first step is to look at your financial situation. However, there are some others questions you might need to consider before you can fully answer that.
Here’s what you need to figure out to keep your personal loan affordable.
How big of a loan can I get?
One way to figure out how much you can afford to borrow is to apply for a personal loan.
After all, it’s in the lender’s best interest to limit your loan to what is affordable. This limits the lender’s risk of losing money.
“From the lender’s view, your application should show your ability to comfortably make the monthly payment—whether that’s $250 or $750 per month,” says Michael Foley, Credit Officer, Personal Loans for online lender Earnest.
“The lender wants to ensure you’ll be able to make your payments in a timely fashion and that you will still have a cushion in your budget so you can weather other unforeseen expenses or additional debt,” adds Foley.
That’s where the loan approval and verification process comes into play.
A lender verifies and weighs various factors before approving your loan request. These factors include your income, other debts you hold or are repaying, and other monthly expenses.
The lender then uses that information to determine what would be an affordable loan principal for your finances.
Keep in mind, however, that “what you might consider ‘affordable’ might be slightly different than the lender’s definition,” Foley explains.
Essentially, it’s possible you could be approved for a much higher loan than you’ve perhaps budgeted for.Check Out Earnest Personal Loans Here
How much can I afford to pay each month?
At the end of the day, this a question only you can answer. A big factor to consider is your own disposable income and money management skills.
Your disposable income is the portion of your take-home pay that is left over after you cover all necessary living expenses. Or, as lenders call it, your “monthly free cash flow after taxes and other fixed obligations,” Foley says.
Ultimately, you decide how much of your disposable income you can devote to repaying a personal loan. For some people that could be as much as half. For others, it could be much less.
Once you’ve come up with the dollar amount you would be willing to pay each month, you can plug that monthly payment into a calculator. This can tell you how much of a principal you could get based on your desired monthly payment, repayment period, and interest rate.
How much do I make each month?
How much you earn each month will directly affect how big of a personal loan you can afford or be approved for. After all, you can only repay your debts with the money you earn.
“A typical approved applicant will have total unsecured debt of less than 30 percent of gross annual income,” says Foley.
So if you have a $50,000 annual salary, for instance, a $15,000 personal loan would be considered affordable.
If you already have other unsecured debts, however, you’ll need to take that into consideration.
Credit cards and student loans are some of the most common forms of unsecured debt. And if you’re already carrying a balance on these debt types, you might have less room to take out a new unsecured personal loan.
What is my debt-to-income ratio?
Another way to figure out how much personal loan you can afford is to consider the debts you’re already repaying.
Before deciding how much to lend you, lenders often compare the amount of your overall debt to your income. This is also known as your debt-to-income (DTI) ratio.
“Affordability may vary depending on total debt obligations such as your student loans, auto loan or mortgage, other fixed expenses, and requested loan term,” Foley explains.
Figuring out your debt to income ratio is pretty straightforward.
Divide your total monthly debt payments by your gross monthly income. Your monthly debt payments should include student loans, car loan, mortgage, credit cards, and any other debts.
So what is a favorable DTI?
“Affordability is viewed in the context of an applicant’s entire profile and may vary case-by-case,” Foley says. “Generally applicants with a debt-to-income of less than 50% will have a higher chance of approval.”
What is my credit score?
Your credit score doesn’t directly affect how affordable a loan is. However, it does show how responsible you are with debts.
“In general, lenders want to see that applicants are using credit responsibly and are not overextending themselves,” Foley says.
Some “indicators” lenders look out for, according to Foley, may include “high credit card balances, recent delinquencies, or high DTI.”
If you’ve missed payments or had delinquent accounts in the past, those are big red flags to lenders. And it could be a sign that you need to pay more attention to your finances and develop healthier money management.
Some lenders are flexible when it comes to the credit scores of borrowers. For instance, Pave and Citizens Bank have minimum credit scores under 700 for personal loan applicants.
Other lenders like SoFi don’t have a minimum FICO score for personal loan borrowers. However, applicants with SoFi typically have a score of 680 or higher.Start a SoFi Application Today
Would this loan stretch my finances thin?
At the end of the day, no lender will have the same up-close view of your finances that you will. Or be able to answer your question “how big of a loan can I get?” Only you can truly determine whether a loan will stretch your finances too thin.
Even if you’re not at risk of missing payments, a personal loan might not be affordable if it keeps you from saving money or working toward other financial goals.
“When seeking a personal loan, potential borrowers should not be calculating the maximum possible payment they can afford,” Foley points out.
Instead, Foley recommends that borrowers should consider “the principal and payment amount that they can live with while still comfortably meeting existing debt obligations and being prepared for a rainy day.”
“It is important to leave some cushion,” adds Foley.
On top of considering what you can afford, limit how much you borrow to what you actually need.
“Requesting just the amount you need will put less strain on your finances and increase your chances of approval,” Foley says.
Interested in a personal loan?Here are the top personal loan lenders of 2017!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
Citizens Bank Disclosures
Personal Loan Rate Disclosure: Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 1, 2017, the one-month LIBOR rate is 0.98%. Variable interest rates range from 5.97% - 15.72% (5.97% - 15.72% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% - 16.24% (5.99% - 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term(see examples), and include Loyalty1 and Automatic Payment2 discounts of 0.25 percentage points each, as outlined in the Loyalty Discount1 and Automatic Payment2 Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
|5.67% - 29.99%||$1,000 - $50,000||Visit Upstart|
|4.99% - 14.24%1||$5,000 - $100,000||Visit SoFi|
|8.00% - 25.00%||$5,000 - $35,000||Visit Payoff|
|5.97% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$5,000 - $50,000||Visit LendingClub|
|5.25% - 12.00%||$2,000 - $50,000||Visit Earnest|
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