by Christy Bieber | May 12, 2019
When you take out a personal loan, you’ll need to decide how much to borrow. The desired loan amount is going to depend upon what you’re using the funds for -- but also, on how much a lender is willing to give you.
Lenders typically have both minimum and maximums for their loans. This means you can’t borrow too much, or too little. For the majority of personal loan lenders, the minimum loan amount is a few thousand dollars. This means if you need just a few hundred dollars, you’ll have a more limited choice for where to secure financing.
The minimum loan amount can vary substantially from one lender to another.
Because there is so much variation from one lender to another, your best bet when you need to borrow is to shop around and check rates and loan terms from multiple different lenders. You should be able to find a lender who is willing to make a loan for your desired amount, provided that you have reasonable credit and aren’t looking to borrow a very small sum.
When you’re deciding how much to borrow, it makes a lot of financial sense to borrow the minimum that you need to accomplish your financial goals. After all, the more you borrow, the more interest you will have to pay and the costlier the loan will be.
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Borrowing a smaller amount of money can also make it easier for you to get approved for a loan, since lenders aren’t taking on as much of a risk when they loan you just a few thousand dollars compared with when they loan you tens of thousands of dollars.
With a smaller loan, your monthly payments will be smaller -- even if you opt for a shorter loan term so you can become debt free faster. Having small monthly payments is important for your debt-to-income ratio. Your debt-to-income ratio is calculated by measuring your debt payments relative to your income. A high debt-to-income ratio can prevent you from getting a mortgage or other financing.
You don’t want to borrow less than you need to accomplish your goals -- so you should carefully consider what you’re hoping to achieve by taking out a personal loan and how much money you need to do it. If you’re trying to pay off and consolidate other debts, for example, you’d ideally want to borrow enough to repay all the debt you’re hoping to consolidate. By figuring out the minimum funds needed to pay off other debts, you’ll be able to determine exactly how large of a loan you need to take out.
Sometimes when you don’t need to borrow a fortune, you may have a limited choice of lenders willing to make a loan that’s small enough for you. Those lenders may not offer you terms that are as favorable as lenders with higher loan minimums.
If you find yourself in this situation, it may make financial sense to choose the lender offering the better terms even if you need to borrow a little more than you set out to take on. However, the caveat is that you should do this only if you can immediately repay the additional sums you were forced to borrow. If you want to borrow $1,000 and the lender you prefer offers $5,000 loan minimums, for example, you could decide to borrow the full $5,000 you need to qualify for a loan and then pay back $4,000 right away.
This approach can work as long as you’re able to qualify for the larger loan based on your credit and income -- and as long as you’re responsible enough to pay back the extra right away. Before you decide that this is the best approach, make sure you read the fine print on the loan carefully. Some lenders have prepayment penalties, so you would need to make sure that you are not charged a fee for paying back more than you intended.
You should also understand how the terms of your loan work. If you borrow $5,000 on a fixed rate loan, typically your payments will be fixed for the life of the loan. In other words, the monthly payment you make will be calculated so you’ll pay off the full $5,000 over the designated loan repayment term (which might be three years, five years, or some other time period agreed to with your lender).
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If you prepay $4,000 in principal because you borrowed more than necessary, this doesn’t mean your monthly payments will go down since you only have a $1,000 remaining balance. Your monthly payments will stay the same for most loans, but you’d just pay back the loan much more quickly since you’d only have a small amount left to pay.
This can be a good thing if you become debt free sooner, but the monthly payments on the higher loan balance may not be as affordable.
Ideally you’ll be able to find a lender that will allow you to borrow only the amount you need, and that will give you a loan with a reasonable monthly payment and good terms. Just be sure not to borrow more than is necessary to accomplish your goals and to shop around among lenders to find the best deal so you don’t spend more money on interest than is necessary.
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