“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.
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.
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 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000|
|6.26% – 14.87%1||$5,000 - $100,000|
|6.99% – 35.97%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|4.99% – 29.99%3||$10,000 - $35,000|
|5.99% – 18.99%4||$5,000 - $50,000|
|15.49% – 34.49%5||$2,000 - $25,000|
|6.16% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|