How Much Can I Borrow for a Personal Loan?

How much you can borrow for a personal loan depends on your finances. If you’re considering a large purchase, looking to consolidate debt, or fund an emergency expense, a personal loan may be a good option. They have flexible loan terms and often carry lower interest rates than a credit card. 

Before applying for a personal loan, you’ll want to understand how it works, compare offers, and know what to expect. Learning more about this option can help determine if getting one makes sense for you. Let’s dive into a personal loan and what you need to know.

Common Ranges for Personal Loan Amounts

Personal loans come in various amounts, depending on the lender and the borrower. Lenders offer personal loans as small as $1,000 to as high as $100 thousand. The average balance for a personal loan is $11,548. 

The amount you’re eligible to borrow depends on your loan terms and finances. You can generally access a more significant loan amount with more favorable terms if you have a higher credit score. Small-dollar personal loans are typically accessible to people across the credit spectrum, but you may face exorbitant fees and interest rates. 

Factors Determining Personal Loan Amounts

When considering a loan, you’ll want to understand what factors could affect your borrowing capacity and how lenders determine loan amounts. 

Credit Score

A credit score measures the risk a lender can expect if the loan is approved. It shows a lender how reliable you are at paying off debt and is one of the most influential measures of your creditworthiness. Five components impact your credit score: payment history, how much you owe, credit history, your credit mix, and recent credit activity. The information is used to develop your credit score, a three-digit number ranging between 300 and 850. A good credit score can help increase your loan amount because the higher your score, the less of a risk you pose. Generally, you can secure a personal loan with a score of 650. 

Debt to Income (DTI)

Lenders consider your ability to repay debt. They want a sense of your budget once you add another payment to the mix. They need to know your ability to make another monthly payment and how much you can handle. Lenders calculate your DTI ratio, or how much of your income goes toward debt payments. To calculate DTI, a lender adds outstanding debt such as mortgage or rent, auto loans, credit cards, and other personal loans. They divide the number by your gross monthly income. Most lenders like to see a DTI below 36%. If the new personal loan pushes you above that limit, your lender might counteroffer with a lower loan amount.

Loan Type

There are two types of loans: secured and unsecured. Secured loans are backed by collateral, such as a car. You can usually borrow up to half of the value of the collateral, but you risk losing your collateral if you fall behind on payments. With an unsecured loan, no collateral is necessary. You qualify based on your credit score and DTI ratio. If you stop making payments, the lender can’t take your possessions, but they can sue for repayment. Most personal loans are unsecured. 

Cosigner

A cosigner is someone who adds their name to the loan application. They become financially responsible by law to repay the loan if you don’t. A cosigner is typically in a better financial situation than the borrower and assures the lender the loan will be repaid. If you have a cosigner, they evaluate both of your economic conditions during the application process. A cosigner has equal responsibility as the borrower for the loan. If there is a late payment or default, both credit scores suffer.  

Tips to Increase Your Loan Approval Amount

Lenders use a set of criteria to make loan decisions. If you want to make yourself more attractive to lenders, there are ways to improve your credit and present your finances more appealingly. 

To increase your loan approval amount, consider:

• Longer Loan Term. Extending the repayment term will result in a lower monthly payment. Be aware that longer repayment terms mean paying more interest over time. 
• Enlist a Cosigner. A co-applicant with a better credit score and financial history can help you get approved for a lower interest rate. 
• Opt for a Secured Loan. You can increase your loan size by offering collateral. Offering something of value might boost the loan amount.
• Pay Down Existing Debt. Existing debt can impact how much you’re able to borrow. Work on paying off current debt before applying for a new loan. 
• Improve Your Credit Score. Order a free copy of your credit report, look for any mistakes, and report errors to the credit bureau. Other ways to improve your score take more time and effort but can be worth it. They include asking to have late payments or old collection accounts removed and chipping away at debt. 
• Compare Loan Offers. To receive the most competitive terms, get quotes from multiple lenders. Consider getting prequalified, which provides loan estimates without impacting your credit score. 
• Increase Your Income. A higher income means you’ll have a lower DTI. Consider a new job or side hustle. It’s likely to take months more to provide a lender with evidence of your increase in income, but using the extra time might be worth the wait. 

Alternatives to Personal Loans

A personal loan can be a way to cover expenses, but they’re only fit for certain people. You’ll want to weigh your options and possible alternatives. 

Alternative to consider:

• Home Equity Loan. Home equity loans are commonly known as second lien or second mortgage. The loan is paid in one lump sum using your home as collateral. Home equity loans have a fixed interest rate with a predetermined term, but failure to repay could put you at risk of foreclosure. 
• Home Equity Line of Credit (HELOC). Your home secures a home equity line of credit and gives you a revolving credit line. You draw on money as needed and pay interest only on the amount you draw. You’re borrowing against the equity in your home, and your house is used as collateral. As you repay the outstanding balance, the amount of available credit is replenished. HELOCs have variable rates, which means the rate will fluctuate with market interest rates, the same way a credit card would. 
• APR Credit Card. A credit card charges an annual percentage rate (APR) set by the issuer. The interest rate is applied to the balance on your credit card balance. You can avoid interest charges if you repay what you owe by the due date. Your APR can change if your card charges a variable rather than a fixed rate. Consider the amount of APR you expect to carry a balance on the card rather than paying it off monthly. 

Getting a Personal Loan

Personal loans are good for various purposes, but they aren’t recommended for nonessential expenses. Before taking out a personal loan, weigh your options and review your financial situation to see if it is the right choice.

Consider avoiding a personal loan if:

• You Can’t Afford It. Remember, you need to pay back the loan. If you can’t afford monthly payments, skip it.
• You Don’t Need It. If you’re taking out a personal loan to cover something you don’t need in the immediate future, like a vacation, put it off until you have cash.
• Better Options are Available. A home equity loan or line of credit might be a better choice for home improvement and repairs. You may save money with an auto loan for cars or other vehicles.

Reasons to consider a personal loan range from funding medical bills to consolidating debt and anything in between. Your circumstances and financial situation will dictate when to consider a personal loan. Focus Federal Credit Union can advise you of your options and help you determine if a personal loan fits. Learn the requirements and how to apply.