How much can I borrow, versus how much should I borrow

If you’re thinking about taking out a loan, you’re probably wondering how much you’ll be able to borrow. That’s useful to know, but there may be another number that could be even more important – the amount that will allow you to take your next step while feeling comfortable and confident.

Sometimes, what lenders are willing to lend you and your own, personal “comfort” number are the same, or very close. But that’s not always the case. Here are a few things you might think about to find the number that will work for you.

What shapes the amount you can borrow

When lenders are working out what you can afford to borrow, they’ll look at things like your income, your expenses, any existing debts you’re servicing, and your credit history. All lenders have their own ways of doing this, and you can sometimes find that different lenders form different judgements on an application, even with the same information. In New Zealand, lenders are required to check that loans are affordable for borrowers and aren’t likely to put them into hardship.

Two different questions

A more interesting question than how much you’re allowed could be how much you think you should borrow.

There is no pressure to borrow the maximum a lender will offer you, and choosing the amount that feels right for you can be a really positive step. You might think your lender’s assessment is appropriate – or you might prefer to be more conservative. You know your own financial situation better than anyone, and how repayments are likely to feel when you’re adding them into the mix of your life.

The number that fits you

You might like to run a few scenarios through a calculator like the better finance™ loan repayment and car loan calculators to see the sort of repayments you might be facing. From there, you can see how things like the loan term you choose might affect what you pay. You might think about whether you’ll still have money for holidays, birthdays and other treats, or how you’ll feel each payday knowing your repayment is coming up.

Leaving room to breathe

You may have a loan for a few years, and it’s common for things to change over that time. It could be that your own situation changes, or there might be external factors that affect how you manage your money. Lots of people have had to contend with things like higher fuel or power bills lately that might have changed the make-up of their household budget. When you’re thinking about how much you want to borrow, you might be trying to leave yourself a little breathing room in case of something unexpected.

It’s a great feeling to have a loan repayment that fits comfortably with the rest of your financial life. One that’s a bit higher than you would like can mean you’ve always got it in the back of your mind in a way that can become a drag over time.

How the loan term changes things

Your loan term may play into your decisions about what feels right for you. The longer your loan term, the smaller your repayments will usually be, although you’ll be paying the loan for longer so your interest cost may be higher. Shorter loan terms mean higher repayments but usually less interest paid overall.

There’s no right answer here, but there are some trade-offs to think about as you’re deciding what is the appropriate option for you. Borrowing the maximum you qualify for isn’t always the goal for every borrower. Understanding the amount you feel comfortable and confident about could make all the difference to how your loan feels.

If you'd like to talk it through, the better finance™ team can help you find an amount and a loan that fit your situation.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.