Working Out How Much You Can Afford to Borrow

If you are considering taking out a loan, stop and consider whether you can truly afford it. Thinking about the money you will get can be enticing, but loans are not free, and too often people forget to thoroughly check whether they can afford the repayments. Before taking out a loan there are many considerations to take into account and you may not realise just how many.

Do the Maths

First on the agenda should be looking at how much money you earn. Although it seems obvious, this point cannot be stressed enough. Budgeting for the repayments should involve having money left over after the essentials each month, being able to make the payments is all well and good, but if you can’t afford to do any of the things you do for fun, and take for granted every month, the years you spend paying back your loan could be long and arduous.

The best way to work out whether your current income can cover the repayments you would need to make on a loan, is to create an expenditure spread sheet. This involves dedicating a substantial length of time to sitting down with any bank statements or pay slips that you have, and calculating the real world income and expenditure in an average month. Make a file for the fixed payments on things like your bills, internet and cable payments etc. and a separate one for variable spending, things like birthdays, holidays and one off payments go here. The more specific each spread sheet is the more effective it will be. It won’t be fun but it will give you an accurate picture of how much money you spend on what each month, and in the long run it will make your planning for loan repayment more realistic.

Consider Current & Future Commitments

The expenditure spread sheet is a great place to start, but there are other considerations. Circumstances change and this is something very important if you intend to take out a loan. Loans are a long term commitment so think about things such as job cuts at work, limiting your income. One time that is tempting to take out a loan is when planning for a child, as they are an expensive commitment, but think of the practical implications. The likelihood is that your household income will be cut if one of you takes time off to look after the baby, and more of the money that you do earn will be being spent on a new child, this would leave very little left over for a loan and could cause serious trouble.

It’s not all doom and gloom though, the positive side is that you may realise you can in fact afford a loan, or even better you may not need one. While considering the future changes in your life you might want to think about whether you are likely to receive a promotion or pay rise any time in the near future. If so then you may indeed be in a position to take out a loan, or it may even be more worthwhile to just wait until your increased income, instead of borrowing money. These are all things which should be put into a separate spread sheet which can help to calculate just how much you need a loan, and what kind of position you are in to pay it back. Remember to take into account external factors such as changes in interest rates.

However much work you do on your own, nothing is more effective for you when it comes to organising your finances than hiring a professional. Help is available and often can be the difference between a disastrous loan arrangement, and some quick financial relief when you most need it.

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