Personal loans are a very helpful solution if you are looking for a quick way to finance large expenses. This type of installment loan allows you to borrow a lump sum and repay it gradually over a long period of time. Plus, they are usually unsecured, meaning you won’t have to use your house or an alternative asset as collateral.
A personal loan can finance any type of expense. For instance, some popular reasons why people take out personal loans include:
When it comes to personal loans, many people ask themselves: how much can I borrow? The answer depends on various factors, including the maximum sum offered by each provider and your financial situation.
Let’s explore these factors in greater detail.
The maximum sum available for an unsecured personal loan varies from lender to lender. Typically, creditors set the maximum loan amount between $40,000 and $50,000. Yet some providers have a higher maximum limit. For example, with a Level Lending personal loan, you can borrow up to $55,000.
Of course, it’s never advisable to borrow more money than you actually need. After applying for a loan, your provider will let you know the maximum amount you qualify for. Yet you shouldn’t feel like you have to borrow the entire sum.
Let’s say you are planning to undergo a certain medical treatment. The cost may vary based on your choice of clinic, doctor, or treatment method. Your main priority should be deciding which option will impact your health best. It would be unwise to go for the most expensive treatment just because your loan provider lets you borrow that amount.
Moreover, the total loan amount available shouldn’t be the only factor you consider when evaluating lenders. You should also rate each loan provider in terms of:
A credit score measures your creditworthiness by summarizing your open accounts and current debt obligations.
The FICO score is the most commonly used credit score system by personal loan lenders in the United States. At any given time, a borrower’s credit score can be between 250 and 850, with higher values indicating higher creditworthiness.
Your score tends to increase when you meet your payment deadlines or reduce your credit utilization rate. In contrast, missing payments, increasing your credit utilization, and applying for new loans or credit cards will harm your score.
According to Forbes Advisor:
Your credit score doesn’t just impact the lender’s decision to accept/reject your personal loan application and your interest rate. It can also affect the total amount your creditor lets you borrow.
According to Wallet Hub, you should have a credit score of at least 660 to apply for a $20,000 personal loan.
Many finance websites provide data on the credit score required to apply for a personal loan with different lenders. Yet keep in mind that this is usually the score needed to apply for the lower range amounts offered by that particular lender.
So, if a lender offers personal loans between $3,000 and $45,000, a credit score of 660 may be enough to apply for a $10,000 loan but not a $30,000 loan.
There are other solutions to consider if you have bad or poor credit and the amount you need to borrow is too high for your current credit score. For example, you could consider a secured loan, which lets you borrow money by using certain assets as collateral. Other alternatives include credit union loans and payday loans.
Keep in mind that certain unsecured loan providers offer services to borrowers with bad credit. They may not offer the total sum you need, but you can at least finance part of your planned expenses (and find alternative solutions for the remaining share).
Taking out an unsecured personal loan will trigger a hard inquiry, that is, a request by a financial institution (or other company) to review your credit report. This may have a negative short-term impact on your credit. Typically, a soft inquiry is conducted first to see if you qualify for the loan. If you seem to fit the criteria, a hard inquiry is performed to get a more detailed look at your credit score and creditworthiness.
The impact of a hard inquiry on your FICO score doesn’t depend on the loan amount. However, the more money you borrow (thus increasing your total debt), the higher the negative impact on your credit score will be after getting the loan. Therefore, it’s important to avoid missing any payments to put your credit score back on track. Doing so could even improve it in the long run.
Income is one of the main factors influencing the borrower’s ability to repay a loan. In particular, lenders will evaluate:
All other factors being equal, the stabler and higher your income, the higher the amount of money that you can borrow when applying for a personal loan.
You may be asked to provide your recent pay stubs or tax returns as proof of your income. That’s because this information is not included in your credit report.
Moreover, your lender may continue checking your income situation even after issuing the loan.
Looking at a borrower’s income alone is not enough for loan providers. More important than your income is your debt-to-income ratio or DTI. It’s calculated by dividing your monthly debt obligations (including credit card debt) by your gross monthly income (what you earn before taxes and before deductions).
For example, if your gross monthly income is $2,600 and your monthly debt obligations amount to $700, your DTI is 0.26 (or 26%).
Your debt-to-income ratio will affect:
All other situations being equal, the lower your DTI, the higher the amount you will be able to borrow.
Having a high income alone won’t be very helpful if you also have a high debt that pushes your DTI above 40%. A good rule of thumb is to stick to around 30% or below for your utilization rate.
On the whole, the main factors affecting the total amount of your personal loan are:
The higher the first three factors and the lowest the fourth factor, the higher the sum you will be able to borrow.
Having good credit, a steady income, and a healthy debt-to-income ratio increases the chance that you will be able to borrow the maximum amount offered by your lender of choice.
Level Lending offers a stress-free application process. Choose how much you want to borrow and complete our quiz. Our advisors will reply immediately with a free loan offer at very attractive conditions.