Loan Affordability

How much can I borrow?

The maximum amount which an individual is able to borrow, can be affected by a number of factors. Many lenders will use a fixed multiple of the applicant's income to ascertain the maximum loan available. Often, the monthly payments of any outstanding credit commitments are deducted from the income figure before the multiplier is used, which can have a large impact on the sum borrowed. If a loan is secured against a property, or other assets, the lender may be more generous in their lending criteria, as they are able to claim any outstanding loan balance from the secured asset if the borrower were to default on the repayments.

An individual's credit rating could also affect a lending decision. If someone has a poor credit score, a lender may restrict the amount they are prepared to advance. Many lenders also use affordability to assess the maximum loan available.

How does a lender calculate affordability?

This is normally calculated by a simple breakdown of income versus expenditure per month.

Firstly, the total income is added together. This could include basic salary, overtime or bonus payments, commission, maintenance payments income from a second job and some state benefits such as working family tax credits. From this total, the monthly expenditure is deducted. For the purposes of a loan application, many lenders will only deduct other credit agreement payments such as mortgage repayment, existing loan and credit card commitments, but for your own peace of mind it is worth making a more detailed examination before applying for a new loan. For this you should include things such as monthly utility bills, shopping and motoring expenses, insurance premiums etc. along with a deduction for leisure expenditure.

Many lender's own websites contain a page which has a full income/expenditure chart, which allows an individual to make a thorough assessment of their affordability

Can I improve my affordability in order to borrow more?

It is possible to increase affordability figures in a number of ways. Ideally, any existing credit arrangements should be cleared prior to applying for a new loan, which would allow additional available monthly expenditure to fund the new loan. However this is not usually a realistic option for someone who is wishing to borrow more in the first place. It is possible to consolidate existing loans and credit card payments into the new loan. This could dramatically reduce an individual's outgoings and enhance the affordability factor (see debt consolidation loans).

Another method of improving affordability is to extend the term of the potential loan. By spreading the repayments out over a longer period, the monthly cost is reduced and could therefore fall within someone's budget. A note of caution at this point, by consolidating existing debts and extending the term of a loan or other credit agreement, although the monthly payments will be lowered, the overall cost of the credit could be considerably more than if it were taken over a shorter term, as interest will need to be paid for longer.

Should I borrow the maximum available to me?

Sometimes it can be advantageous to borrow extra funds when applying for credit, for example to repay outstanding credit card bills which charge a particularly high interest rate, but this should always be approached with caution.

It's always nice to have extra money in your bank account, but remember that any funds borrowed must be repaid to the lender at some point along with the interest, which will be charged on the loan. Therefore it is important to establish exactly how much you require before you apply for a loan, taking into account all the above factors and only apply for the amount you need, not what the lender tells you is available to you!