How the Banks Determine Your Borrowing Capacity

How the Banks Determine Your Borrowing Capacity

“I’ll go down to the lender’s office, sign the papers and get my money” – this is the kind of mentality of more than half of the people who want to get loans.

We, on the other hand, know that it’s not so simple. There are countless things that banks will weigh in order to assess how much – if at all – you can borrow.

If you’re planning on taking out your very first loan, this list we’ve compiled will let you make your own preliminary “hearing”, to put it like this, in the sense that you’ll get an answer to your questions.

Things that Impact Your Borrowing Capacity

1. Your Income

Naturally, the higher your income, the larger the amount of money you can borrow becomes. This applies only if the said income is steady and in the same amount from month to month. People with lower income can get a loan, but a rather smaller one.

It goes without saying that banks are more prone to handing out loans to those who actually afford them.

2. Your Deposit

Believe it or not, your deposit has a lot more weight in the banks’ decision-making process than your credit score and income combined. This is most probably because a large deposit is somewhat equivalent with a good financial behaviour: it shows banks that you’re a savvy person.

The deposit can be of as much as 20% of the total amount of money you’re planning on borrowing.

3. Your Credit Score

If your credit score is pristine, banks will lend you more money. A low credit score is among the main culprits in the rejection of loan applications and is most of the times a consequence of having missed on payments on previous loans or having had too many hard credit checks.

This is not to say that errors can’t possibly slip in your credit file and take a toll on your credit score. You get a sense of why it’s crucial to check your file yourself before the bank does it.

4. Your Monthly Expenses

It doesn’t really help to have a huge salary while you have plenty of monthly expenses. Banks will review those expenses and they’ll have a pretty hard impact on your overall borrowing capacity.

90% of borrowers don’t even think that this aspect plays a role in their borrowing capacity and they’re always in for a bitter surprise. Make some quick calculations and see how much cash you’re left with after you’ve paid your bills every month.

Concluding Remarks

As you can see, banks will take a lot of things into consideration in order to assess how much money you can borrow without becoming a threat to both yourself and them.

The info we’ve provided you in this article will help you determine if you’re eligible for a large loan or not. If you’re not, it’s not the end of the world: you can always improve any of the aspects listed herein to have a successful application.

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