How Much of a Loan Can I Be Approved For?
There are going to be times in our lives when we need a loan as there are some purchases and some financial emergencies, that we cannot, or have not saved money for.
To purchase a property or a car, many of us are not going to have the money in the bank to simply pay cash for the purchase; so we need a mortgage loan, or some form of financing to buy a vehicle.
In many instances, the actual purpose for the loan will determine the loan amount.
If you are buying a car and the sale price is £10,000, and you have a deposit of £2,000, then you require a loan of £8,000.
The same can be said for mortgage loans.
A property selling for £150,00, and you have a deposit of £15,000, dictates that you need a loan for £135,000.
However, in some instances the purchase may not always dictate the loan amount, and even if the purchase does dictate the loan amount, you need to be approved for that amount.
There are going to be instances where as a borrower you may not be approved for the amount of a loan you are requesting. And as we look at what can determine how much of a loan you will receive, if it is lower than what you need, you still have options.
Also, some types of loans will dictate the maximum amount that can be borrowed. Some types of loans have a maximum amount they will lend, such as £7,500, £10,000, or possibly £15,000.
This can also dictate the amount, and type of loan you may wish to seek out.
Affordability: How Much Do of a Loan Do You Qualify For
For many loans, there are two main factors used in determining if a loan will be approved or rejected, and affordability is one of the factors. And it is a big factor.
You can have the greatest credit in the world, but if you cannot afford to repay a loan, the lender cannot afford to take the risk. In addition, lenders are bound by regulatory bodies to carry out affordability checks.
This is usually done by having the borrower complete an income and expenditure form, showing all their income, and all their expenses.
Different lenders have different lending rules and criteria as to how they show and accept affordability for a loan.
There can be ratios used, such as a percentage of your income they will allow for the loan payment, and a ratio as to what they will accept as a percentage of all your bills and accounts related to your income.
Sometimes these are referred to as front-end and back-end ratios.
If a lender allows a front-end ratio of 15% of your income for a loan payment, and your monthly income after taxes and NI is £1,000, this would be £150.
If a lender allows a back-end ratio of 25% for all your accounts, not counting household bills, this would be £250. (not counting rent/mortgage, and all other household expenses)
If you already have one loan outstanding with a monthly payment of £150, then that lender may only allow you a monthly payment with them of £100, as you already have a payment of £150, and the maximum they will allow you for debts is £250.
Good Credit vs Bad Credit
The second big factor lenders use for some loans is credit scores. There are some loans, such as guarantor loans, that do not use credit scoring as a condition of a loan.
Guarantor loans are based on affordability, and having a guarantor.
With good credit some lenders may stretch the loan amount higher than they usually would based on their affordability scales. They may allow for higher ratios for a loan payment, and also a total debt ratio.
This would be based on the fact the borrower has good or excellent credit, so the lender feels the odds are higher the loan will be repaid.
A borrower with bad credit may still be approved for a loan, but the ratios allowed for the loan may be reduced, and the interest rate may be higher, all due to the increased risk to the lender.
Credit scoring is important in being approved for many loans, but affordability is paramount and the largest key factor used in granting or rejecting a loan.
So what can you do if you are rejected for a loan, or the loan amount you are approved for is not sufficient for your needs?
There are three things you can do:
* Save a larger deposit, or save so you require a reduced loan amount
* See if a guarantor or a co-signer will be accepted to strengthen the loan