Before you apply for any loan, it pays to figure out how much you can comfortably repay. Borrowing the right amount means your loan solves a problem instead of creating a new one.
Start with your monthly take-home pay
Use what actually lands in your bank account each month after taxes and deductions. If your income varies, use a conservative estimate.
Subtract your essential expenses
Add up rent or mortgage, utilities, groceries, transportation, insurance, childcare and the minimum payments on any debts you already have. Subtract that total from your take-home pay. What is left is the most you could put toward a new payment, but you should not plan to use all of it.
Leave room for the unexpected
Here is a simple example. If your take-home pay is $3,200 a month and your essentials total $2,500, you have $700 left over. A new payment that uses all $700 leaves nothing for surprises. A payment closer to $200 or $250 leaves breathing room for things like a medical copay or a higher utility bill.
Check your debt-to-income ratio
Your debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross monthly income. Lenders often use it when reviewing applications, and it is a helpful gut check for you too. The lower it is, the more room you have in your budget.
Borrow only what you need
It can be tempting to borrow a little extra just in case, but every extra dollar costs interest. Get a firm number for the expense you are covering and borrow that.
Look at total cost, not just the payment
A longer term lowers your monthly payment but usually increases the total interest you pay. Compare the APR and the total of payments, and ask whether you can pay early without a penalty. To learn more, read What Is an Installment Loan and How Does It Work? or call our team at 702-330-0458 to talk it through.
