How much can you afford to borrow on a loan?
If you are considering a loan, the most important factor before you even set out to find the right loan for you is affordability. While on paper a loan can seem affordable, you really need to sit down and draw up a proper budget. This way you can ensure that you can comfortably meet the repayments.
This is because if you take out a loan and you find that you cannot meet your monthly repayments, you could find yourself getting in to financial difficulties. Apart from being unpleasant, this will affect your credit rating negatively and will make it harder to get credit such as loans, a credit card or a mortgage, in future.
The first thing to do is to draw up a list of your income and expenditure. Write down your current net income and then list all your outgoings, from your rent/mortgage to fuel/transport costs; food and insurances, utility bills and regular savings, even clothing and vets bills.
Look at the remainder and then halve it. Ideally, this is the amount that you can afford to spend out each month on a loan.
Do also take in to account that your circumstances can change. While you may be able to comfortably afford a loan now, have you thought what will happen if you are made redundant? Or you take a lesser paid job? Or your ‘guaranteed’ overtime dries up? What will happen then?
Finally, do remember that, in life, nothing is for free! Loans do cost and by taking out a loan, you will be paying interest.
As an example, say you want a loan of £4,000 over five years. This will cost you £87.64 on a loan with a rate of 11.9% APR. This sounds like a great amount to be paying every month. However, do bear in mind that the total interest you will pay over the period of the loan will be £1258.40 – that’s more than a quarter of the amount that you have borrowed.