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How Is Your Maximum Loan Amount Calculated?

How Is Your Maximum Loan Amount Calculated?

Planning to apply for a personal loan at your local bank? A personal loan can help you raise money in a flash, whether it’s for buying a new home or funding a vacation in Europe. The catch is that while personal loans can be used for a wide range of general purposes, they’re trickier to get due to the long list of qualifications required.

Before applying for a loan, it helps to first estimate the maximum loan amount you could borrow from a lending institution. While banks often have their own distinct standards of loan eligibility, they tend to use the same range of data to calculate how much they can lend you. Here we look at the common factors banks will consider before they let you sign the dotted line.

1. Your monthly income

A huge factor in a bank’s decision to grant you a personal loan is your ability to pay it off on time. They will gauge your financial situation by looking at two things: your salary and your monthly expenses.

Other factors they may consider include your debts, tax status, additional sources of income, and your spouse’s salary, if you’re married. With all of these taken into account, calculate how much money you’d have left every month after you make a repayment. Last but not least, banks may also look into your credit rating as a shorthand for how reliable your are in settling your financial obligations.

2. Repayment terms

Like with insurance plans and other installment-based expenses, banks give you the option of paying off the full amount of your personal loan within a set period of time. You could choose to go for a longer or shorter loan period, depending on which works best with your current financial situation.

In the case of mortgages or home loans, repayment terms can span decades. But with personal loans, tenors can range anywhere between 12 and 60 months (one to five years), depending on your bank. Banks also charge penalties if you pay off your loan too early, making the right choice in loan tenor all the more important.

3. Interest rates

Personal loans are mostly unsecured loans, meaning that interest plays a vital role in determining the cost of your monthly payments. As a rule of thumb, a higher interest rate amounts to a lower maximum loan amount. Factors that could lower or raise your interest rate include whether you have bad credit or unstable finances. It’s also important to note that longer loan periods mean you pay more interest over time.

4. Do the math

Once you’ve obtained the figures for your monthly income, loan tenor, and monthly interest rate (or annual interest rate divided by 12), you can start doing rough calculations for the largest possible amount you can borrow from your bank.

Your monthly interest (expressed in decimal form) is R, your loan tenor (expressed in months) is M, and the payment from your monthly income is P. The formula for calculating your maximum loan principal would look something like this:

5. Other things to consider

These days, many banks and lenders in Malaysia offer packages with fixed loan amounts, while others set online payday loans Illinois their maximum loan amount at no more than eight to ten times your salary. Some lenders offer flexible terms, with interest rates or loan periods that could change over time to reflect your financial situation. Not everyone is qualified for this, however, so it’s best to inquire about all the possible options available to you.

A good working relationship with your bank can also make a difference, with some banks offering better rates as a reward or incentive for customer loyalty. Whichever deal you choose in the end, staying true to your monthly repayment schedule will reduce hassle and save you thousands of dollars in fines and penalties.

It also helps to compare personal loan offers before making your choice, to help you find the maximum loan amount for the monthly repayments you can afford.

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