Banks and other finance companies will consider many things when assessing an application for a personal loan. While you’re probably used to submitting your details so a lender can run a credit check against your name, in recent years, particularly as regulations around responsible lending have tightened, you will have found yourself entering details of your regular spending so that lenders can get an idea of what you can afford. Prior to having to submit such detail, it was usually enough to simply provide evidence of your income. Alongside the outcome of the credit check, a lender would then make a decision on what they can lend to you, and at what interest rate.
In asking for this information, lenders are looking to determine your debt capacity. How do they do this, and what can you do to work it out for yourself, in order to get an idea of what you can borrow?
Determining Debt Capacity
When asking for information about your existing expenditure, essentially what lenders are doing is asking you to provide your household budget. If you have already taken the time to plan your own budget, and you know exactly what your incomings and outgoings are, then you will likely already have an idea of what your debt capacity is.
As part of this review, lenders may specifically look at your existing debt repayments and credit commitments. The information you have submitted may also be checked against the information the lender can see when they review your credit report.
While lenders will consider your debt capacity when you have made an application, in many cases, including here at MacCredit, we will seek to determine this, and thus what you can afford, during our initial conversation with you. This not only enables us to determine which loans are affordable for your circumstances, but also to ensure you do not over-expose yourself to debt.
How This Benefits You
While some consumers can see the submission of certain details as invasive, ultimately when lenders aim to determine debt capacity it is for the benefit of the borrower. While consumers may find it upsetting or annoying that they have been declined for a loan, or told they can only borrow a certain figure, lenders have a responsibility to ensure they lend responsibly, and would be acting negligently if they were to lend money without fully considering each individual’s debt capacity.
From a consumer perspective, it means you’re not going to find yourself with debts you cannot repay, a scenario which can then lead to your credit history being damaged and an inability to acquire credit in the future.
Determining and Enhancing Your Debt Capacity
Determining your debt capacity is simple. All you need to do is plan your budget and work out what you have left as disposable income from all your incomings and outgoings. You can then work out how much of that disposable income can be used for repaying debts. Remember that you will need to consider how much you are paying out for current debt repayments within this. Please note that lenders may make a decision not to lend to you, even if you feel as if your debt capacity allows you to take on more debt and continue to meet your repayment obligations.
You can also enhance your debt capacity by sharing your financial obligations with your partner. When asking for your outgoings, lenders will ask about what you are personally responsible for, and how much you are paying out. If mortgage payments, electricity bills, and your other living expenses are split between two, this will reduce your individual personal outgoings and so enhance your own debt capacity. Doing this may make it easier for a lender to approve a credit application, subject to your credit status.
How Much Can You Borrow?
The amount you can borrow for a payment plan will be determined by your credit file as well as your debt capacity. Work out how much you can afford to repay yourself prior to applying, and you may have a better idea of the type of loans you can apply for, how much you can borrow, and the length of loan term you will be able to access.
If you are looking to take out a payment plan to cover medical expenses, MacCredit can help you identify what is affordable for you as well as find a plan to suit your circumstances. Call us today on 1300 884 355 to discuss your options.