Qualifying for a Loan: 5 Factors Affecting Personal Loan Amounts
How much can you borrow for a personal loan? Personal loan amounts depend on the lender and your financial history.
Personal loans can be a great way to pay for large purchases such as a car or a wedding, or to consolidate high-interest debt, but the process of qualifying for a personal loan can be confusing. If you are considering taking out a personal loan, make sure you thoroughly research different lenders to find the best lending option for you.
Before applying for a loan, determine how much you are looking to borrow. Keep in mind that different banks have different requirements for lending, and that the personal loan amount you qualify for will vary depending on the lender as well as your own financial situation. According to data from TransUnion, the average loan amount for new personal loans as of May 2020 was approximately $6,825. Many banks may be able to offer higher amounts, but in order to keep your monthly payments affordable, it’s important not to borrow more than you need.
Below, we explain how to qualify for a personal loan by discussing five factors that affect how much you can borrow.
1. Credit score
Your credit score is one of the main factors that lenders look at when determining whether or not to approve you for a personal loan. It affects your personal loan amount and your interest rate. While there is no “magic” number required to qualify for a loan, the terms of your loan will be more favorable with a higher credit score.
In general, if your credit score is below the mid-600s, you may be considered a risky borrower. While you still may be eligible for a loan, the amount you’re able to borrow will likely be lower than someone with a credit score of 700 or higher.
You are entitled to a free credit report every 12 months from the three primary credit bureaus: Equifax, Experian and Transunion. In addition, many credit card providers offer free access to your FICO® score. If you know you’ll need to take out a loan in the near future, take the following steps to improve your credit score before applying:
- Keep credit card balances low
- Ensure that you are making all payments on time, including credit card payments and debt payments
- Limit how often you apply for new credit
- Increase your credit line on existing accounts to lower your credit utilization rate
2. Existing debt
When you apply for a personal loan, lenders want to make sure that you will be able to pay it back. To help assess the risk of offering you a personal loan, lenders will examine your payment history and any existing debt. This can include credit card debt as well as debt from mortgages, student loans or other personal loans.
If the lender notices a history of late payments or determines that you already have too much debt to effectively pay back an additional loan, they may not approve you for a loan. Alternatively, they may offer you a personal loan with higher interest rates than you were hoping for.
To improve your chances of getting the personal loan you need, work on reducing existing debt, starting with your highest-interest account. This can go a long way in reducing financial stress and can make it easier to meet your payments once you get your new loan.
3. Employment history and income
When lenders examine employment history, they are primarily looking at your income and whether or not it has remained steady over time. A borrower with reliable annual income poses less of a risk to the lender than someone whose income is inconsistent. Some banks have income requirements for certain types of personal loans, so be sure to ask about this before filling out an application.
In addition, lenders look at your debt-to-income (DTI) ratio by comparing your monthly debt payments to your gross monthly income. Your DTI ratio is expressed as a percentage, showing how much of your monthly income goes towards debt. DTI can help lenders determine if your income will be able to effectively cover your monthly loan payments.
You can calculate your own DTI by creating a list of monthly debt payments. Then, divide the total by your average monthly pre-tax income. If your DTI ratio is 36% or less, you have a good chance of getting approved for a personal loan.
>>Related Reading: What Percentage of Income Should Go to Mortgage?
4. Loan repayment terms
The repayment terms of your loan can affect the amount of money for which you qualify. The term length of a personal loan varies from lender to lender, usually falling between one and five years. A longer term will result in lower monthly payments, while a shorter term loan will have higher monthly payments.
If you’re looking to borrow a higher amount, you may need more time to pay off the loan and should look for lenders with long-term repayment plans. However, keep in mind that the longer the loan term is, the more interest you will end up paying in the long run.
As you research different lending options, use a personal loan calculator to see what your monthly payments would look like based on amount, term and interest rate.
>>Related Reading: 7 Questions to Ask When Applying for a Personal Loan
5. Type of personal loan
Finally, the type of personal loan you apply for affects the amount you can borrow. Lenders tend to offer a variety of loan options, such as auto loans, home equity loans, personal lines of credit and more.
A personal loan is a lump sum of money that you pay back over a specific period of time, while a personal line of credit is a type of revolving credit similar to a credit card. You have a credit limit you can borrow from each month, and your payment is based on the amount you end up using. When deciding between a personal loan and line of credit, consider whether you plan to use the funds for a one-time large purchase, or if you need to use the money to cover ongoing, fluctuating expenses.
Both traditional personal loans and personal lines of credit can be either secured or unsecured. With a secured loan, you provide collateral that is tied to the loan—and the bank can keep your collateral if you fall behind on payments. In most cases, personal loan amounts for secured loans will be higher than unsecured loans, but they are a riskier option for the borrower. Unsecured loan options tend to be for smaller amounts and are often harder to qualify for because of the risks they pose to the lender. However, they can be a good choice if you don’t want to risk potentially losing your collateral.
Cadence Bank can help you achieve your financial goals
Taking out a personal loan is a big decision, and our team of personal bankers are happy to help you determine which type of lending solution is best for you. Cadence Bank offers a variety of personal loans and lines of credit which can help you meet your financial goals. Contact us today to learn more about our credit options.
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.