When you want to apply for credit, it is essential to become aware of your ability to borrow because it is one of the criteria that will determine the decision of a lender to grant you or not a bank loan.
What is borrowing capacity?
Borrowing capacity determines the ability of a person to apply for a loan based on their income as well as their monthly expenses. Generally, the lenders consider that the monthly payments of a credit can not exceed a third of the incomes of a home. Beyond that, getting a loan may become very difficult because if the monthly charges are already too high, the repayment of a loan could lead to over-indebtedness. Borrowing capacity can be used to determine the maximum amount of monthly payments an individual can afford, the amount of the loan and the length of the loan that can be requested.
The calculation of borrowing capacity is the basis of any credit granting. It allows to know the capacity of a person to repay his monthly payments while avoiding a situation of overindebtedness. This makes it possible to determine the total sum that he will be able to borrow.
The debt ratio
The debt ratio is the share of a household’s income that is used to repay loans, whether it is a consumer loan or real estate loans. The debt ratio that should not be exceeded, defined and monitored by most lenders is 33%. This is not a regulatory rate but it is of common use. Indeed, a person will have a hard time accessing credit if their debt ratio exceeds this threshold because the lenders consider that this would present a risk of excessive repayment. However, the study of a borrower’s file is not done not only on the basis of the debt ratio but also on his personal profile as well as his remainder to live. It should be noted that access to credit could be facilitated for some people with a debt ratio higher than 33%, if they have a comfortable income and a high level of living. On the other hand, less regular or more modest income could lead to a refusal to grant a loan, even if the debt ratio is less than 33%.
The rest to live
The remainder to live is the main indicator of the standard of living of a home and thus makes it possible to evaluate its borrowing capacity. It corresponds to what a household has to live each month, after having paid all its fixed expenses. The calculation of the remainder to live is a simple operation where it is enough to subtract the fixed charges to the income of a household (on a one-month basis). Expenses will include all regular and incompressible expenses. The income, meanwhile, will refer to all the money coming into the family wallet.
The remaining amount is used to estimate the amount of money that can be spent on repaying a loan and thus the additional debt that a household can commit to. There is no reference living remains, everything will depend on the level of income. However, the lower the income of a household, the more important it becomes to maintain a significant living income.
How to perform a loan capacity simulation?
Many sites offer simulation tools to estimate your borrowing capacity. To use it and to estimate at best the amount that you will be able to borrow, it is essential first of all, to take stock of your situation. To begin, note that to access credit, whatever it is, it is always more advantageous to be in a stable financial situation. For example, if you are a permanent employee for several years, within the same company, you will be more likely to obtain a favorable response for your credit application than if you work in fixed-term or temporary for example . It is the same if your banking situation is stable and you have never had problems with your bank.
Before you do a simulation of your borrowing capacity
You will also have to take stock of your resources and gather all the necessary documents to do so. The resources of your household can include wages, rental income, commercial and industrial but also non-commercial benefits, pensions received, various allowances and other income.Then you will also have to add up the different monthly expenses that you have to pay such as rents paid, housing expenses, pensions paid, credits that you already have in progress as well as any other recurring charges.
With all this data, you will not only be able to get your monthly borrowing capacity but also your debt ratio as well as your remaining livelihood. By reading this information, it will be easier for you to better define your project and thus know the amount that you will be able to borrow.