2 Factors That Will Affect The Amount You Can Borrow On A Personal Loan

If you’re looking for a personal loan, one of the first questions you will want an answer to is ‘how much can I borrow?’  Whilst mortgages tend to have an easy formula for working out your borrowing potential, unsecured loans are based on a range of different criteria.

Here are two of the most important factors that will affect how much you can borrow on a personal loan.

Your Credit Score

Unsecured loans don’t require you to offer any collateral as security.  This means that there is no item that the lender can repossess (such as a car or property) if you fail to keep up your repayments.  Consequently, your credit score and your previous track record of maintaining repayments to debts are the most important factors to many lenders.

The vast majority of personal loan companies will look at your credit file to see how you have managed debt in the past.  If you can demonstrate that you have made all your payments to mortgages, loans and credit cards on time, you are much more likely to be approved for the size of loan that you require.

If you have missed payments or you have other adverse credit, a lender may not consider you quite as good a risk and may restrict the amount of lending they are prepared to offer.

What You Can Afford

Whilst many mortgages and secured loans are agreed based on what the lender is prepared to advance, many personal loans are agreed based on what you are able to afford.

Most lender websites have some sort of ‘loan calculator’ where you can work out what your loan repayments would be based on the loan amount, interest rate and term of the loan.  This gives you an easy way of working out what loan amount and term are affordable to you.

Many banks and building societies offer loans on an ‘affordability’ basis.  They will take details of your income and major outgoings in order to determine how much cash you have available at the end of the month.  They then take the proposed new loan payments into account before deciding whether they think you will be able to maintain the repayments on the new loan.

Bear in mind that the interest rates available on personal loans often reduce as the loan size increases.  You will sometimes find that your repayments and interest charges are slightly lower if you increase your borrowing by a small amount, making the loan even more affordable.

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