Factors That Can Affect the Amount of Your Personal Loan

Taking out a personal loan is an excellent way to cover any emergency expense you might encounter. Be it a sudden family trip, medical emergency, major home renovation, essential large purchase or anything you’re not prepared to pay for.  

Identifying how much you need to borrow is one of the critical factors you must consider before applying for a loan. After all, you’d want to get approved on a loan that will give you the entire amount you need. 

The guide released by the Financial Consumer Agency of Canada (FCAC) says that most personal loan amounts typically range between $100 and $50,000. But how much you can qualify for will depend on several factors. Equipping yourself with the components personal loan lenders look into when reviewing your loan application is a great place to start. 

For a well-informed decision, we’ve highlighted the top factors that can affect the amount of your personal loan. 

Types of Personal Loans

Personal loans in Canada come in two types, and each can impact the amount you’re eligible to borrow. 

  • Unsecured Personal Loans: This type of loan won’t require you to pledge any valuable assets. Since it’s not secured by collateral, you can only borrow up to $50,000 for unsecured personal loans. Plus, lenders may require a higher credit score to limit their risk. 
  • Secured Personal Loans: This type of loan is backed by collateral, such as your home, car, or savings account. In case of a default, lenders can repossess the pledged asset, so they’re much more willing to lend you a higher amount. Auto and home equity loans are common examples of this type of personal loan. 

Credit Score

Lenders usually review your credit score when deciding whether or not to extend you a personal loan. It consists of three digits that range from 300 to 850, indicating your creditworthiness or capacity to pay back your debts. 

Note that it’s not a magic number that automatically qualifies you for a loan. But the higher your credit score, the more likely you’ll get approved for a more considerable loan amount with more favourable terms. 

Debt-to-Income Ratio

Every lender wants to ensure you can pay them back before approving your personal loan. Besides examining your credit status, they will look into your existing debts. Lenders may offer you a smaller loan with a higher interest rate if they find out you have too many debt obligations simultaneously. They also may not offer you the loan at all. 

Lenders typically use the debt-to-income (DTI) ratio to determine how risky you are as a borrower. DTI ratio is the percentage of your overall monthly income that goes toward your monthly debt payments. Typically, a DTI ratio between 28% and 36% will increase your chances of getting approved for a larger personal loan amount. 

Loan Term

The loan term is the length of period the lender gives you to repay the loan. Most personal loans have payment terms ranging from 12 to 60 months or longer. However, it depends on the type of personal loan and the lender you decide to work with. 

If you have to borrow a substantial loan amount, you’ll need more time to pay it back. For example, a mortgage loan may have a 15-year term, meaning you have 15 years to repay it. 

Be More Proactive on Your Loan Application

As with other types of loans, a personal loan is not free money. You’ll need to repay it within a predetermined period along with interest. As much as possible, be more proactive when applying for a personal loan. Consider the factors and qualification standards lenders usually examine and only borrow what you need and can comfortably afford to pay. 

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