Want a little pleasure, need a new washing machine, desire to discover a new horizon, need a new car? Opportunities to subscribe a consumer credit are not lacking. But for whatever reason, recourse to a consumer loan should not be taken lightly. The amount of credit will depend on the borrower’s debt capacity. How to evaluate it and launch the project? Here’s all there is to know about calculating borrowing capacity.
What is borrowing capacity?
Borrowing capacity refers to the maximum amount you can borrow. It differs from repayment capacity, which is the maximum amount the borrower can repay monthly. In the calculation of borrowing capacity, the following are taken into account:
- The net income you have when you apply for a loan.
- The amount of your expenses.
- The duration of the loan: the longer the repayment period, the higher the borrowing rate (and therefore the amount of the loan).
The consumption credit depends on borrowing capacity
Whether to borrow 100 € to offer a gift to a loved one or to borrow 600 € for the purchase of a new refrigerator, you should know that the loan consumer is subject to the same rules as a credit larger, type real estate loan: the borrower must be solvent to repay the amount due. This solvency will be calculated with the borrowing capacity of the subscriber. Even for small amounts, the lending institution needs to know the repayment capacity of its client. This capacity is calculated from the subscriber’s fixed incomes and charges, knowing that the debt ratio accepted by the financial institutions is 33%. But we will see later that the calculation of borrowing capacity is not everything!
The calculation of the debt ratio for the amount of the loan
The calculation of the debt ratio is done according to the following formula:
(Loan load / net income) × 100
Mr. Dupuis earns € 2,000 per month and spends € 450 rent plus € 100 repayment of a work credit. Its debt ratio is therefore (450 + 100) / 2000 × 100 = 27.5%. Therefore, its borrowing capacity for its consumer loan is 33 – 27.5 = 5.5% of its income, so 110 €. To subscribe a cheap conso loan, it is better for Mr. Dupuis to choose a short repayment term. To borrow € 200 or € 500, he can also subscribe his online conso loan, the simplest being to make a simulation online. The tool makes it possible to evaluate its repayment capacity and / or its borrowing capacity (according to the simulator used).
Calculation of borrowing capacity: the maximum debt ratio of 33%, a strict rule?
In truth, no. It is quite possible to borrow more than 33% of indebtedness, without having a borrowing rate that is too high. The calculation of borrowing capacity is just one of many indicators. Each project is different and studied individually by the bank. To define your borrowing capacity, the latter will also take into account:
- Your savings
If you have one (and even if you do not intend to use it as a contribution), the bank will be reassured. Because saving every month shows that you can support a recurring charge. And so, that you are able to honor your monthly payments.
- The load jump
It corresponds to the difference between the monthly amount paid for your principal residence to date (rent, repayment of the mortgage) and the amount of the monthly installment to come. If your load jump is low, the bank will probably follow you in your new real estate loan project despite a debt ratio higher than 33%.
- Managing your account
You have no overdrafts or payment incidents on your previous statements? Perfect ! The bank will tend to follow you even if your debt ratio exceeds 33%. However, in the opposite case, it may refuse your loan application even if it is well below this threshold.
- The rest to live
These are disposable income after payment of charges and monthly payments of credit. However, in the case of large incomes, the debt ratio can be well above 33%. Which, ultimately, distorts the calculation! To determine if you can support an additional monthly payment, the bank will logically make the calculation of your remainder to live.
- Your profile
Your age and your professional situation will in particular affect your ability or not to borrow. For example, for a young engineer at the beginning of his career, the bank will consider the future growth of his income. It will then be more willing to provide credit with a debt ratio significantly higher than the average.
Then, between a person employed on a permanent contract and a contractor, the bank will make a difference. While the permanent contract employee will be able to borrow without a minimum duration of seniority, the entrepreneur will have to prove a minimum of 3 years of activity in order for his income to be taken into account.
To give life to your project, count on Creditstair and its particularly attractive borrowing rates. A free credit simulation from our platform will allow you to take the measure!
Three key points to remember about calculating borrowing capacity
- This calculation mainly takes into account income, expenses and the duration of the loan.
- The calculation formula is: (borrowing / net income) × 100.
- This is not the only criterion considered by the bank: your savings, the management of your account, your remainder to live, your profile and your load jump (current monthly payment – future installment for a mortgage) count as well. They can allow you to borrow well over 33% debt ratio.