With the rate that consumer debt continues to rise, it may appear to some like as if there is no limit to the amount they can borrow. This will appear particularly true if the debt is to be secured with a secured loan. However, all lenders still impose strict limits on the amount they will lend to you. In fact, if it appears as if a lender is too willing to lend you more than you believe appropriate, it is a good sign that you should begin to be getting suspicious of the practices and standards of the lender.

What is Your Credit Rating?

The way lenders calculate how much they are willing to lend depends strongly on your credit rating. This will be a score calculated by a credit rating agency that will use various pieces of personal information to determine what kind of borrower you are likely to be and how much of a risk is involved in lending to you. Your credit rating will involve looking at your address, how long you’ve lived there, whether you own or rent the accommodation, your age, if you are married or single, your education, your income, your past repayment habits, your outstanding levels of credit, and whether you’ve ever been declared bankrupt or legally pursued for debt before. Of all this information, probably your current income will be one of the most important, although lenders do try to build up an overall picture using all the information that is available to them.

Credit agencies – Experian UK & Equifax UK

Eligible for Greater Loan Amounts?

Lenders will also have different classes of loans, with different terms and conditions attached to each class. These will also be charged different levels of interest for the different types of loan that are on offer. These various terms will be applied to different borrowers depending on their credit rating. So for example, if you are a judge, with a high income and no unpaid bills ever in your life, you will be very attractive to lenders who would like to lend money to you, and therefore, they will offer you very good rates based on the fact that they believe you are likely to be able to pay back the amount without difficulty.

On the other hand, if you have a lower income, plenty of outstanding debt and some unpaid bills in the past, then lenders may still be willing to extend credit to you, after all, this is their business, but the terms on which they are willing to do so will be less attractive and the interest rates will be higher, to represent the greater risk involved in lending to you.

Apart from the terms of the loan, these kinds of criteria, will also be used to determine how much you are entitled to borrow. While there may be little risk involved in lending you one thousand, and thus the terms will be attractive, there is a greater risk involved in lending you say fifty thousand and the terms of the loan will represent this. On the same principles, there comes a point when lending you the sum of money you seek is so high that the risk is simply unacceptable and you therefore will not be able borrow this amount.

Security Required for Large Loans

In fact, practically speaking, there are certain sums which lenders will never give to anyone without some amount of security in return. This will be the case no matter how good your credit rating is. By security is meant that you will have to provide some assets, such as your house, which the bank can take legal security over. This means that if you become unable to repay the loan, the bank can come in and take the asset and sell it to recover the debt. Therefore, securing a loan over your home is always a move that you should only make after careful consideration because there is always the risk that if you fail to keep up with repayments, your home will be at risk. Particularly if you have a family or young children, this is a risk that you will not be willing to run and therefore you should only borrow on a secured basis if you are certain that you can afford to repay it in line with the terms and conditions of the loan.

Conclusion

Therefore, for most people, the limit to how much they can afford to borrow will depend on the value of their home. Homes generally have extra equity in them. This is the value of the home in excess of your current mortgage, so for example, if you have a home worth one hundred thousand, and a mortgage for fifty thousand, then you will have fifty thousand in unused equity in the home which banks will be willing to lend against. These days, with house prices continually increasing in value, most people who own their own homes will be able to borrow a substantial amount on a secured basis, depending on how much equity they have free in their home.

External Sites with more information

• Managing Your Borrowing from MoneyLaidBare – The new site from the FSA with sensible, practical advice
• Don’t pay upfront for a loan warns Citizens Advice – New scam that is fooling lots of UK residents, read the advice from Citizen’s advice and don’t fall into the trap.
• Dealing with debt from AdviceGuide – feeling snowed under with your debt? Free impartial advice from the charity organisation.