Borrowing capacity is an essential concept to understand when you’re thinking about taking out a loan. Whether you want to buy a house, finance a project, or simply get a consumer loan, your borrowing capacity plays a crucial role in approving your application. At Credit Instant, we know how important it is to grasp this concept to maximize your chances of getting the financing you need. In this article, we’ll explore in detail what borrowing capacity is, how it’s calculated, and how you can optimize it to achieve your financial goals.
How to calculate your borrowing capacity
To calculate your borrowing capacity, you need to consider several factors. Basically, financial institutions look at your income, expenses, and current debts. The basic rule is that your debt payments, including your new loan, should not exceed 40% of your gross income.
Here’s a simple formula to give you an idea:
- Calculate 40% of your monthly gross income.
- Subtract your current monthly debt payments from this amount.
- The result is the maximum amount you could potentially allocate to a new loan each month.
For example, if you earn $5000 per month before taxes, 40% is $2000. If you’re already paying $500 in debts each month, you could potentially allocate up to $1500 per month to a new loan.
Key elements to consider
When we talk about borrowing capacity, there’s not just one thing to look at. It’s like a puzzle with many pieces that need to fit together. Lenders check several elements to ensure you can repay your loan without getting into trouble. Let’s take a look at the three most important factors.
Income and job stability
Your income is the foundation of everything. Lenders want to see that you have enough money coming in each month to cover your payments. But it’s not just the amount that matters, stability is super important too. If you’ve been at the same job for years, that’s a big plus. However, if you change jobs often or if you’re self-employed, it can be more complicated.
Debt-to-income ratio
The debt-to-income ratio is the percentage of your income that goes towards paying your debts. Lenders use two ratios: the gross debt ratio and the total debt ratio. The first shouldn’t exceed 32% of your gross income, and the second should stay below 40%. This means if you earn $5000 per month, your housing payments shouldn’t exceed $1600, and all your debt payments together (including housing) shouldn’t go above $2000. If your ratios are too high, it can limit your borrowing capacity.
Savings and personal contribution
Having savings and being able to put in a good amount from your own pocket can really boost your borrowing capacity. It shows lenders that you know how to manage your money and that you’re serious about your approach. For a mortgage, for example, the bigger your down payment, the more likely you are to be approved and get a better rate.
Tips to improve your borrowing capacity
Alright, now that we’ve seen what the key elements are, let’s give you some tricks to boost your borrowing capacity. It’s not always easy, but with a bit of effort and planning, you can really make a difference.
- Pay off your existing debts.
- Increase your income.
- Improve your credit score.
- Save for a bigger down payment.
- Consolidate your debts.
- Be patient.
- Check your credit report.
Remember, there’s no miracle solution. It’s by combining several of these tips that you’ll see the best results.
Maximizing your chances of getting the ideal credit
Well, there you have it, we’ve covered the topic of borrowing capacity. It’s clear that it’s not a simple matter, but it’s really important if you want to secure the best possible credit. At Credit Instant, we’re the pros to help you navigate all this. We understand that each situation is unique, and that’s why we offer personalized solutions for all our clients. Contact us today!