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How Much Loan Can You Afford to Borrow?

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When you need a loan in an emergency, you can’t ever be approved for too much money, right? You want to feel secure with a loan capable of paying any unexpected expense, after all.

But how much money is right for you?

Taking out an enormous personal loan or line of credit might sound great at first, but you will

change your tune once it comes time to repay what you owe. The more you borrow, the more you have to pay back.

The online loan experts at Fora recommend you avoid applying for a line of credit or personal loan if you can’t afford to repay your loan. That piece of advice applies to Fora Credit as well as any other online loan you might want.

According to Fora, it’s important you suss out your financial situation to make sure a personal loan is the best move for you — and that extends to its size, too. You can learn how to do this with the tips shared here today.

What is the Danger of Taking out a Loan That’s Too Big?

Danger might seem like an overreaction, but it’s important to think of it in these terms when talking about borrowing.

When you take out more than you can handle, there’s a good chance you won’t be able to pay back what you owe according to the right due dates. Missing due dates has two immediate drawbacks:

You Will Accrue Late Fines and Interest

Paying bills late costs money, adding heaps of fees to your already too-big loan.

Once you miss your due date, your lender may slap you with a late fine. But that’s not all.

Depending on how they calculate your interest, your outstanding balance may accrue additional interest and finance charges.

You May Damage Your Credit History

One missed due date can easily roll into two and three until you’re chronically late. You may even fail to make a payment in its entirety. At this point, your lender may report your tardiness to the credit bureaus, which will negatively impact your payment history.

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Once a late payment is on file, your score could drop by 180 points. However, the exact effect depends on what’s already in your report.

How Can You Tell What is Affordable?

In most cases, your lender will approve you for a loan amount that they think is appropriate for your financial needs and profile.

That said, you should always double-check that this amount is something you can genuinely afford. You can do that by making some calculations.

Drop Your Loan Payments into Your Budget

You should see how paying your loan will affect your household budget. Don’t be alarmed if it doesn’t fit neatly into place on your first try. You might have to cut some unnecessary spending to fit your new loan. As long as you can juggle all your responsibilities in addition to these payments, your loan size might be an option.

Determine Your Debt-to-Income (DTI) Ratio

Just because you can balance the budget doesn’t mean your loan size is appropriate. You may be stretching your budget too tight if your DTI ratio is too high.

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Your DTI shows how much of your income goes towards debt, expressed as a percentage. If your DTI is higher than 50%, you could be in a tricky position if another unexpected expense arrives.

With most of your income covering just debt, you might not have enough left over to cover your housing costs and your unforeseen expense.

The Takeaway:

If your budget or DTI flags your loan size, borrow less or figure out an alternative way to handle your next unexpected expense. This choice may save you stress, late fees, and credit damage.

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