If you think you need a personal loan, your first question may be, “How much loan can I get?” While it’s important to figure out exactly how big of a loan you can obtain from a lender, there are other factors you should consider as well. The loan terms, including the interest rate and length of the loan, are also important to understand and they determine how much you’re required to pay each month.
It can be hard to calculate your own personal loan limit without applying for a loan with a lender. There are many factors a lender considers when determining how big of a loan you qualify for. The loan limit and the terms will help you to calculate exactly how much your monthly payment will be and how long it will take you to pay off the loan.
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What Affects a Personal Loan Limit?
If you’re wondering, “How big of a loan do I qualify for,” keep in mind that there are several determining factors used by lenders to find out if you qualify and how much you qualify for. When you apply for a loan, the lender will analyze this information and if you qualify, you’ll be provided with a loan offer that the lender feels comfortable with.
Credit Score
Your credit score gives your potential lender a snapshot into how you’ve handled past debts. Your lender can see your payment history and how much experience you have paying off loan debt. Your credit score will determine if you qualify for a loan and the terms the lender will feel comfortable providing to you.
A credit score of 700 or above is considered “good” and a score above 800 is considered “excellent.” Some lenders won’t offer you a personal loan unless your credit score is above 700, while others aren’t as strict and may provide an offer if your score is 680 or higher.
Existing Debt
If you have a lot of existing debt, the personal loan limit you qualify for may be low, if you qualify for a personal loan at all. Lenders look at current debt as a red flag signaling that you may have too many monthly expenses and won’t be able to pay back the loan provided to you.
When you apply for a personal loan, the lender will calculate your debt-to-income ratio. To make this calculation, the lender will simply divide your monthly debt payments by your gross monthly income. Each lender may have its own limit for your debt-to-income ratio, but generally, your debt must be less than 35% of your income to qualify for a personal loan.
Income
Income is an important factor that lenders consider when determining how big of a loan you qualify for. These lenders want to ensure you’re making enough income to pay back the loan within the loan term you agree on. You’ll be asked to provide proof of income when you apply for a loan so the lender can determine how this new monthly loan payment would affect your finances. In most cases, a lender won’t approve you for a personal loan unless the loan payment is less than 30% of your income.
Loan Term
When figuring out how much loan you qualify for, you should also analyze the loan term. The term of the loan is how long you have to pay it back. If you have a long loan term, your monthly payments will be smaller and more affordable. However, if your loan term is set aggressively, you won’t have as long to pay back the loan and your monthly payments will be higher.
How To Calculate a Loan Payment
It’s important to not only understand your personal loan limit, but also to be able to calculate your monthly loan payment. You can use the Google Sheet Loan Calculator to help. You can also complete the calculation by hand, as long as you have the loan amount, payment information, interest rate, and other factors available.
Loan Payment Formula
To calculate your loan payment, you’ll need to divide the loan amount by the discount factor. The loan amount is the personal loan limit and the discount factor is the number used to discount the loan back to present value.
The formula for calculating your discount factor is: {[(1 + (periodic interest rate)) ^(number of periodic payments)] – 1} / [(periodic interest rate) (1 + (periodic interest rate))^(number of periodic payments)]
For example, say you qualified for a personal loan limit of $100,000. Your interest rate is 6% for 30 years and you must make monthly payments throughout the duration of the loan. You would use the calculation of loan amount/discount factor = loan payment. Therefore:
- $100,000 / 166.7916 = $599.95;
In this example, the monthly payment for your loan is $599.95.
Interest-Only Formula
If you have an interest-only loan, the formula for calculating your payments will be different. To determine your loan payment using the interest-only formula, you’ll need to multiply your personal loan limit by your annual interest rate. Then, divide it by the number of payments you must make each year, which is usually 12 if you make monthly payments.
The calculation looks like this:
- Loan amount x annual interest rate / 12 = loan payment;
If you use the same loan terms you did in the above example, you would divide $100,000 by .06, which equals $6,000 of interest per year. Then, you’d divide $6,000 by 12 months, which is $500. Therefore, the monthly payment for an interest-only loan with these terms is $500.
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