Understanding the borrowing capacity is an essential step before making a loan. Your survival depends on it, hence the interest of scrutinizing the following paragraphs.
What is borrowing capacity?
When you decide to borrow money from a creditor for a personal project, your file must be examined. Borrowing capacity is one of the criteria that enter into its assessment.
It corresponds to the value of your credit. It is part of your purchasing capacity (the other components being personal contribution or additional credits). It is calculated on the basis of your remaining life and your debt ratio.
This last element is important for the banking establishment, insofar as it allows it to ensure that its client is not over-indebted. The first, as its name suggests, represents the sum remaining in the hands of the borrower, once his monthly payments have been paid.
The interest rate can also have an impact on it. As a result, the monthly payment increases at the same time as the rate. The loan payment term also influences this borrowing capacity.
When it is prolonged, the monthly payments fall. Thus, the rest to live becomes more consequent. However, this privilege has a counterpart: the increase in the amount of the credit. The value of the personal contribution does not imply any change, whether at the level of the interest rate or at the level of the monthly payment or at the level of the payment terms.
Requirements of the borrowing institution
Generally, the borrowing institution sets the debt ratio at 33% at most. He can show indulgence, but only towards some categories of people, such as those with high incomes, young people with a promising future (having potential).
The debt ratio exceeds the expected rate, but the rest to live is sufficient? The creditor can make an exception to the rule. It is important to note that banks sometimes take into account the level of taxation of the household for the calculation of this debt ratio.
Regarding the rest to live, the bank’s requirements are based on several criteria, one of the most important of which is location. If you live in Paris and its surroundings, the amount that remains at your disposal once the monthly payments have been paid must be quite high.
Which would not be the case if you are in the provinces. The cost of living is less expensive in areas far from the capital. The number of children and dependents also falls within the criteria imposed by the creditor.
The requirements change depending on whether you are single, in a relationship, or with children. You are single ? Your remainder to live must be between 600 and 1000 euros. Do you live with your partner?
It must vary between 750 and 1000 euros. Do you have dependent children? You must have a sum between 150 euros and 400 euros more for each child.
Increase borrowing capacity
Given the conditions imposed by creditors, your borrowing capacity may be relatively low compared to the value of your project. So you may need to optimize it.
For this, you must opt for the grouping of credits. This is a way to restructure them. Thanks to this solution, you can extend their repayment period and you pay a single monthly payment. The debt ratio is also reduced. However, these benefits come at a price.
Consumer loans are more expensive and loan restructuring costs must be incurred. You are more likely to increase your borrowing capacity if the rate of your loans is high.
Taking two simultaneous loans can also help you in this direction. Thus, the value of your credit increases and your monthly payments decrease. Concretely, you subscribe to a loan for a period of 15 years and another for 20 years, instead of a single credit of 20 years.
This allows you to benefit from a reduction in the interest rate on the first (which is the shortest), and at the same time, on the monthly payments. This option has another advantage: it increases your remaining life.
Calculate borrowing capacity
For the borrower, calculating the borrowing capacity can be likened to a precautionary measure against over-indebtedness. For the creditor, it is a means of determining the customer’s ability to pay his debts.
You can use online simulators to find out the maximum amount you can get from your bank. This tool calculates it on the basis of your personal contribution, your type of credit (which can be fixed or variable rate).
In addition, the duration of your credit, your age at the time of your subscription, your debt capacity, and the monthly payment you intend to pay.
Once the simulation is complete, you can contact a broker like lafederation.org to give you more comprehensive information and to carefully study your project.
Read also: Debt situation: what to do?