Borrower’s ABC: how to choose the loan amount and repayment period?
Loans are at your fingertips. Literally – to get a loan online, just reach for a computer, tablet and even a smartphone. In addition, the variety of offers makes them available to almost the entire society. It can be used by very young people who are just entering adulthood, retirees and even indebted people.
Additional apparent anonymity and discretion also contribute to the fact that more and more clients are turning to non-bank institutions for financial help. However, not always easy access to the loan means that it is tailored to the needs and capabilities of the borrower and ensures a higher probability of repayment on time.
Are the loan costs really the most important?
It would seem that choosing the loan amount and repayment period is the easiest thing to do. This can be done with two quick moves on the loan calculator or, if we want to compare more offers, on the loan comparison engine. The advantage of the comparison tool is also that it will clearly and clearly (and in terms of amounts) present the total costs of loans.
Costs are of course very important and everyone wants to pay as little money as possible. However, the key questions should be questions about the real demand for cash, the minimum time that would allow for repayment as soon as possible and the monthly budget surplus that is available. Without a reliable answer, even a free payday loan is not the best choice.
How much do you have to earn to pay back the loan?
It is not true that loan companies grant loans to anyone, even those who have no creditworthiness. Although the number of rejected applications has also increased recently, the financial requirements of loan companies are not too high. The fact that any income is accepted, even alimony, social benefits or student scholarships, may make you think that your minimum income must be very low. Indeed, most often, in the case of installment loans, the amount of USD 500 or 600 is changed. Meanwhile, in many cases this is just one installment!
So how do you calculate what income will allow for free repayment? Banking institutions calculate this in the manner recommended by the Good Finance Investment Corporation. Recommendation T says that the borrower should not take a loan whose one monthly installment (assuming there are at least 12) does not exceed half of his monthly income. In this way, earning the lowest national, we can spend 750 dollars on an installment monthly, earnings of 2000 dollars will allow for a monthly installment of 1000 dollars, etc.
However, this is not a guideline that should be followed uncritically. Even banks do not and usually take the borrower’s margin of error or safety buffer. This means that this amount is reduced to around 20-30% of income. Let’s take a closer look at the example below:
The borrower earning USD 2,000 can theoretically pay an installment of up to USD 700. At Aasa, he could not borrow a maximum amount of USD 10,000, even if he would like to repay it within 24 months. With such repayment period, however, he could count on the amount of USD 9,800 and each lower. In turn, at Wonga, he could take a loan with the same parameters and have a lot of money – the installment is only USD 503. At Ferratum, such a customer could, according to assumptions, expect a maximum of USD 9,000 for 24 months.
These are, of course, approximate calculations that allow the borrower to calculate the repayment possibility, not the official policy of loan companies. It is very likely that the amount actually allocated will be greater. Of course, these calculations do not apply to payday loans, as their repayment system is completely different.
The balance of revenues and expenses, i.e. we assess with a cold eye
Choosing the right loan amount, contrary to appearances, is not easy. The money available right away is tempting and it is easy to overdo it. It is worth sticking to some unwritten but helpful rules. First of all – borrow only as much as you really need, not as much as you can get.
Second – remember that the larger the loan, the higher the cost. They are not, as we mentioned earlier, the most important, but they significantly increase the level of the monthly installment. Thirdly and most importantly – the above calculations are theoretical, used to segregate borrowers and relate to persons without other financial obligations. So let’s get acquainted with how creditworthiness is calculated – this is described in the article “What is creditworthiness and how to calculate it?”.
Pay the installment
To determine the appropriate loan amount and repayment period, you must first review all your expenses and earn a free amount that you can use to pay the installment. This amount will look different if you earn USD 2,000 and differently if you earn USD 4,000. It can be assumed that in each case the minimum living costs are similar, so in the latter case there will be a lot, even several times higher, to be allocated.
A reliable balance of expenses will let you know not only how much you can really pay back, but also how much money you need to borrow. You may find that in some cases, the installment of the loan can be even less than 20% of your income. If the installment is much higher, you risk not only losing financial liquidity, but also exposing yourself to further costs and serious consequences. This can be avoided.