How Much Can You Afford to Borrow?

Nobody should take out a loan until he or she has determined how much she or he can borrow.

Unfortunately, many mistakes are easy to make when determining what you can borrow. Most people who end up losing their collateral in a secured loan made one of these mistakes.

The biggest mistake people make when trying to calculate what they can borrow is to assume that their income will always be the same or keep increasing. Income levels do not always stay the same. They can fall for a wide variety of reasons.

Never assume that your income will always remain the same and never assume that it will always increase. Just because you have the funds to make a secured loan payment today does not mean you will have them in the future.

A good way to determine if you can pay off secured loans is to verify the reliability of your sources of income. If there is any question about your job security or the soundness of your business, it is a good idea not to borrow.

Savings are Critical

How Much Can You Afford to Borrow?

Another big mistake individuals make is not to have enough money saved up to cover several secured loan payments.

It is also a good idea to keep saving when you take out secured loans. It is often better to pay just the required amount on a secured loan payment and put the additional funds into a savings or money market account. This way, those funds will be available to cover payments in case of an emergency. You will still be obligated to the pay the full amount on secured loan payments until the loan is paid off even if you make larger-than-required payments.

Inflation

Another mistake many borrowers make is to ignore inflation. As anybody who has been going to the grocery store for more than a few years knows, prices constantly go up. This means that the funds that are adequate to cover the total of your secured loans and your other expenses today may not be adequate in a few years.

Do not assume that your salary or business income will keep up with inflation. Instead, always calculate your expenses 10% higher to allow for inflation.

Lock-in Payment Arrangements

Quite a few people who defaulted on secured loans such as mortgages in the last few years did so because the amount of the loan payments increased. Always try to lock in a constant amount of payment and rate of interest on a secured loan.

It will always be easier to plan for constant payment amounts. In some cases, it will pay to get a higher interest rate on secured loans if you can lock in a constant payment.

Do Your Own Math

The best way to determine if you can afford any sort of secured loan is to do your own math. Fortunately, a person does not have to be a mathematical genius to determine the cost of secured loans. Most lenders' websites feature calculators that anybody can use. These calculators can tell you what the loan payments will be and how long you will be paying them.

Once you have calculated what the payments will be, you can see if you can afford them. The best way to do this is simply to add up all of your monthly expenses and add the payment amount to that figure. Then, subtract that figure from your monthly income. This will tell you what will be left over after making the loan payment.

Simply doing the math can tell you how much you can afford to borrow and if you can afford a secured loan. Most people who default on secured loans did not do the math when they borrowed.

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