When it comes to lend a personal loan, have you ever thought how lenders decide the loan amount that you are eligible to get a personal loan and how they assess your ability to repay the loan amount. There are some important factors that decide loan amount.
In this article we’ll learn about the important factors that decide the loan amount and repayment capacity of a borrower.
- Credit Score:
Credit score plays a vital role in personal finance. It shows creditworthiness of a borrower. Financial institutions, Banks and credit unions check borrower’s credit score to check creditworthiness and repayment ability. The higher credit score increases chances to qualify for a higher loan amount with lower interest rates even you’ll have to pay high interest rate with a lower credit score. Pay all the debts before due dates to maintain a good credit score and manage your debts wisely.
- Income and Employment:
Steady source of income is also important factors that lenders keep in mind. A regular monthly salary credited in your bank account may also have a positive impact on your credit history. Having steady income increases your chances to repay the loan EMI on time. A person with high salary will get higher loan amount. A borrower must have income proofs to avail a personal loan.
- Debt-to-Income Ratio:
Debt to income ratio is the ratio of your monthly income and debt that you are paying. Lender uses DTI to evaluate a borrower’s ability to repay the loan amount. Borrowers with a lower DTI ratio are eligible for a higher loan amount. You should not avail a personal loan until you didn’t pay the existing debt, it may lead you into a debt burden.
- Loan Term:
The tenure is an important factor which helps loan EMIs smoothly. Longer loan term often decreases smaller monthly payments even shorter loan period will increase monthly EMIs. However, a borrower pays more interest for a longer tenure even you will have to pay less interest for short loan tenure. But it is important to choose loan tenure wisely to avoid less fee. You need to assess your monthly income, debts and saving that you can save monthly. On the basis of these things, you can assess your ability to repay your EMI.
Secured loans such as car and home loans require collateral as a security in case of loan default. A lender has right to sell your property and car in case of loan default. Collateral provides security to the lender, allowing you to borrow larger amounts. However, it also means risking the loss of your asset if you cannot make payments.
- Loan Type and Interest Rate:
There are different types of personal loans designed to solve different financial situations. Personal loans come with a fixed rate, adjustable interest rate and reducible interest rates. A lower interest rates means lower monthly payments. Assess your financial situations and choose a suitable type of loan according to your needs.
Understanding the factors that determined loan approval is important to make informed decisions. By managing credit score, maintaining financial stability, managing credit score and choosing a right lender with affordable interest rates will help you to manage your finance. Remember, a taking a personal loan can be a wise decision if you know pros and cons of the loans, it is a responsibility to repay the loan on time to balance your finance.