Loans come in handy in times of financial hardships. Not only can you use them in an emergency, but also if you wish to start a business. Unfortunately, the loan amount may not always be as large as desired, though it can still help get you where you need to be.
Before submitting a loan application, prospective borrowers should carefully consider several elements that determine how much they are qualified to borrow. Borrowers must consider the amount of a loan and their borrowing capacity for their budget, especially if they are financing major purchases such as buying their first home. Both variables weigh heavily on financial decisions, so considering them is essential.
Obtaining a loan, whether an auto loan, personal loan or mortgage, can be overwhelming. It is essential to have insight into the elements that could impact your borrowing abilities and how lenders come up with their choices for issuing loan amounts. Knowing this information will help you make more informed decisions as you search for a suitable lender.
Here are some of the important factors that determine the loan amount:
- The Credit Score of a Borrower
A borrower’s credit score directly impacts how much money they can borrow from lenders.
One’s credit score is determined by analyzing several critical elements, most notably how often credit is used and payment history.
A borrower’s credit score accurately reflects the risk a lender can anticipate if they decide to issue a loan. Unfortunately, various elements may decrease one’s rating, from missed payments to late payments. If you have a good score, your personal loan amount can increase.
- Tenure and Type of the Loan
Banks carefully assess applicants’ information and then decide the right loan they are eligible for. After the assessment, the borrower can choose a type of loan that matches their needs and the budget.
Since the loan terms vary, it is highly recommended to familiarize yourself with the terms before making any decisions. Some loans come with a 15-year tenure, and others with short tenure, otherwise known as short-term loans. Borrowers need to collaborate with their lenders to find out what loan and repayment options best suit them.
- The Credit History
Before a personal loan can be approved, one’s credit score and history are analyzed. When evaluating a potential borrower, lending institutions review their credit report for suspicious activities. If detected, this could indicate to the lender that they are dealing with a risky individual.
Financial risk indicators include many inquiries that appear on one’s credit report due to borrowing sprees or multiple loan applications. Every time an individual applies for credit, their inquiry appears on their record. If a credit report shows many inquiries for online personal loans, mortgages, or new credit cards in the same year, it indicates high-risk behaviors and thus alerts the lenders.
- The Duration of Employment
When lenders assess an individual’s creditworthiness, they review their current and past employment records. This will help in determining how stable and dependable a borrower is. Income is often closely tied to the time spent at a job or in certain industries.
A person who has held the same job for more than one or two years is deemed less risky than somebody who recently started a new job or someone with multiple jobs over a short period. As such, loan amounts tend to be higher when there is a perceived lower risk involved.
Although a borrower’s promotion or raise may potentially increase their loan amount, this is not always the case. This is because lenders consider the overall consistency of an individual’s employment record when assessing loan eligibility. For instance, if someone has been earning Rs 100,000 every year but recently received a raise of Rs. 15,000; the past salary is considered and not the new salary.
As such, having a reliable financial and employment history is essential to get a personal loan for salaried with a higher amount.
- Debt-to-Income Ratio (DTI)
For all types of loans, especially mortgages, lenders and banks assess borrowers’ repayment capabilities through their Debt-to-Income (DTI) ratio. The DTI is an essential metric for determining a borrower’s capacity to make repayments. Mortgage lenders strongly recommend that borrowers should spend no more than 28% of their gross monthly income on mortgage payments.
Generally, lenders prefer a debt-to-income ratio between 28% and 36%, calculated by dividing the borrower’s monthly debt payments and dividing it by their gross income each month. If a borrower has a good DTI ratio, it shows they can manage the loan payments and lower the possibility of loan defaults.
Those individuals with a bad credit record, poor job history, or very low income may not be eligible for unsecured loans. When facing a financial bind, there are still secured personal loans that require an asset like cash or some form of property to guarantee your loan.
Because secured loans offer the advantage of collateral protection, lenders tend to be more willing to approve them than unsecured ones. Should the borrower default on their payments, they can legally seize the assets used as guarantees for the loan.
The above are the factors that determine the amount of loan you can get when you wish to apply for a personal loan for salaried. Remember, lenders will assess your employment history, credit score, and history and also look at the DTI ratio to better understand your financial standing. All these aspects will give a lender a clue about the loan amount you qualify for. Borrowers must be honest about their financial situation and provide accurate information so the lender can make an informed decision.