Personal loans are a good option if you need immediate financial assistance. Be it an unexpected home renovation, college education, or an emergency trip - you can use a personal loan to cover anything. That's why lenders don't put restrictions on how you use it. Check out some reliable sites like https://www.best-companies.co.uk/best-uk-loan-companies/ to learn more info!
One of the things you need to consider before applying for any loan is the amount you are looking to borrow. Most personal loans can range from $100 to $100,000. However, the amount you can qualify for will vary from one lender to another.
Knowing how much you can borrow and how lenders determine it can help you make a more informed decision. We'll discuss the five factors that can affect your personal loan amount:
Lenders look at your credit score to determine the risk. Every lender has credit requirements, but generally, a score below 670 is considered poor. It signals that a borrower is high risk and has a history of incurring late or missed payments.
Lenders often use credit scores to determine whether or not they will approve your loan. If you're a risky borrower and still get approved, your loan amount will likely be lower than those with a credit score of 700 or higher. Since lenders will be taking more risks, the interest rates will also be higher.
However, if you have low or bad credit and can’t get the financing you need, you can opt for a personal loan for low credit, which is technically a bad credit loan. With this, you have a higher chance of loan approval.
Lenders would want to ensure you can pay the loan back. So, in addition to credit score checks, they will examine how much debt you currently owe. They may not extend you the loan if they find out you have too many existing debts, such as mortgages and credit card balances. If approved, lenders may lower your loan amount and charge you a higher interest rate.
Debt-to-income (DTI) ratio is one of the factors lenders use to determine your borrowing risk. It's a financial measure that weighs up the number of your existing debts to your overall income. You can calculate it by adding your monthly debt payments and dividing the sum by your monthly gross income. The result will be in decimal. By multiplying it by 100, you'll get your DTI percentage.
Lenders usually prefer a DTI ratio between 28% - 36%. It indicates that you don't have too much debt for your monthly income, and you're less likely to default on the loan.
Lenders may also examine employment history to assess whether your earnings are stable and reliable. Typically, they will look at your employment records from the past two or three years. If you held the same position for more than a year or two, lenders view you as low-risk compared to those who worked at different jobs within a short period.
Remember that they will mostly prefer to grant a more significant amount of loan to a more dependable borrower. Lenders want to see consistency in your financial and employment history. Some of them may even have a required income threshold for specific types of personal loans.
When you take out a personal loan, you'll have to repay it in installments over a predetermined period. The length of time the lender gives you to pay back the loan is considered your loan term. It can vary depending on the lender and the type of loan you take.
Terms for most personal loans can go anywhere from 12 to 60 months or longer. But some lenders only offer short-term repayment plans. If you want to borrow a higher loan amount, you most likely need a long-term repayment plan.
The longer the repayment term, the smaller your monthly payment. Plus, you'll have more time to pay off the entire loan. Remember that the term length of your loan can affect the loan amount for which you qualify and the interest rates.
There are different types of personal loans, and each can affect the amount you can borrow. Here's a list:
The Bottom Line
A personal loan can be beneficial in many ways. But like other types of loans, it's not free money. You'll have to pay it back over a certain period with interest. That's why it's always important to be mindful of your loan amount. Only borrow what you can afford to repay, and don't hesitate to explore other loan options to find what will work best in your circumstances.