Loan borrowing isn’t that easy. As such, borrowers should consider various parameters to help them apply for loans conveniently. One of the critical factors to consider is the amount of loan required. The amount of loan you apply for will help the financial institution, or lenders determine your loan legibility. The loan amount goes hand in hand with borrowing capacity. These two will help any borrower to draft a realistic loan budget.
However, other than the two above, there are other factors that influence the amount of loan to be borrowed.
Factors that Influence the Amount of Loan One Can Get
- Your Credit Records
Before any lender approves your loan, they will first verify the credit records of the prospective borrower. The credit or financial report will be scrutinized for illegal or alarming activities. If they find suspicious activities like too many loan types inquiries, the borrower may not be considered eligible for the loan. The financial report will show all types of loans inquired, and too many loans were inquired within one year, which is considered a red flag.
Any type of malicious activity that may be found in the financial report may make the borrower not qualify for the loan. Therefore, before applying for any loan, ensure you have a clean financial record.
- The Credit Score
These two are used to monitor the borrower’s behavior and the capacity to repay the loan. A credit score is determined by how the individual has been utilizing credit and the loan repayment record. By determining the borrower’s credit score, the lender will know the expected risk in case they approve the loan. Individual credit scores can be affected by negative records such as delayed loan repayment and loan defaulting.
- The Employment History
The working history will give lenders insights into their clients’ income. One’s income greatly influences the amount of loan he/she can borrow. By looking at individual employment history, the lender will know whether they are reliable.
A borrower with more than ten years of working history will be considered more stable and reliable than one who has worked fewer years. Also, the salary you receive equally affects the amount of loan you can receive. If you have a higher salary, you are more likely to receive a higher loan amount.
Although, this does not mean that if you get a salary raise recently, you can borrow based on it. Rather, you will have to borrow based on the previous salary. This is because the lender will have to first track the frequency of the new salary before rendering the loan.
- The Debt Ratio in Relation to The Income Ratio
This is another factor that will be considered before the loan is approved. The lender will look closely at your monthly income and debt deduction to determine your legibility. Each type of loan has a maximum percentage ratio of debt to income. If you exceed that amount, the lender will deny you the loan. This factor is very important because most lenders will not accept a client whose ratio is high. After all, it will increase the loan risk.
- The Loan Deposit
This is applicable if you buy something on loan. It is also called a down payment. A loan deposit is the first amount of money the borrower gives, with an agreement to settle the rest later. The amount of the down payment you have will determine the amount you can get. The higher the deposit, the higher the chance of acquiring high-value goods. For example, if you buy a house, the lender may require you to give at least 20% of the total value.
- The Period of The Loan
Lenders always remember that their client’s financial status may change with time. However, it can’t change within one or two years. But for more years, like 5 or 7 years. If the change is negative, it will affect the ability to repay the loan.
Therefore, the loan period should be considered to lower the loan risk. Most financiers prefer lending short-term loans rather than long-term loans. The problem with short-term loans is that you will have higher monthly payments than long-term ones.
However, you can consider a long-term loan if you are sure there will be no hindrance to your repayment ability.
- The Security Provided for The Loan
Before you take any loan, the lender will ask you to provide collateral to act as security if you fail to repay your loan. Loan security is vital to both the lender and borrower because it ensures both are protected from losses in case of failed repayment. The value of the loan security one is willing to give can determine the loan amount one will receive.
The above are the factors that affect the loan amount one can borrow. Always check your debt ratio and employment history. Above all, ensure you qualify for personal loan before applying for the loan. This way, you can get the urgent loan quickly and prevent loan rejection.