While loans are extremely helpful when making big purchases such as a home, they won't always cover the entire cost. That's because there is still a limit to how much you can borrow. This amount refers to your borrowing power. And one's borrowing power will vary depending on a few factors.
Credit History
The first factor that determines your borrowing power is your credit score. A high credit score indicates a good history of managing debt. This is important because lenders don't like to loan money to someone who has a history of not paying their bills.
Yet before you get too excited about your high credit score, not all credit scores are equal. That's because each lender will use an individual credit score to determine your borrowing power. So even if you have a good credit score, it doesn't mean that you have a high borrowing power with all lenders.
Financial Commitments
This is another important factor that lenders judge you on. If you are struggling to pay your bills, then you can't afford a new loan. This means you will have limited borrowing power. Further, if you have a number of high-interest rate credit cards, then your borrowing power will be limited.
Further, if you're currently paying off a large debt like a car loan, then your borrowing power will be limited. This is because lenders don't want you to accumulate too much debt.
The larger your debt to income ratio is, the easier it will be for you to qualify for a loan. This is another reason why a loan with a credit union is important. Since credit unions are community-based, they usually like to see the entire community prosper. This means they will give loans to people who don't have the greatest credit score or who have a large number of financial commitments.
Deposit Size
Your borrowing power is also determined by how much the lender will require as a deposit. And this deposit amount can vary depending on how much you earn and what you spend your money on.
For example, if you have a large income and you spend your money on expensive things like designer clothes, then you will have to pay a larger deposit. This is because the lender won't want you to default on your loan.
On the other hand, if you have a low income and you spend your money paying off your existing debt, then you will have to pay a small deposit. This is because the lender will see this as a sign of stability. So if you don't have a large income, then you'll have to rely on the good old credit union.
Final Thoughts
Loan amounts are determined by many factors. And if you think these factors limit your borrowing power, then you're partially right. Yet if you know how to play the game, then you can buy what you want without worrying too much about the amount of your loan.
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