Whether you’re buying a car, purchasing a home, or taking out a traditional installment loan, determining your ability to repay is a critically important step. Basically, determining your ability to repay means that the lender is looking at your expenses – meaning how much you bring in and how much you already have to pay out to other lenders – and determining if you can afford to take out a loan.
It is important to note that any lender that does not take your ability to repay a loan into consideration, does not have your best interest at heart and you may want to consider another, more responsible credit option.
Traditional installment lenders work one-on-one with you to determine your ability to repay a loan before making it. First, the lender will ask you to complete a credit application. You’ll be asked a number of questions about your occupation, income, and any existing loans you might have. The lender will also take a look at your credit report to see what type of experience you have with making payments on time, how many accounts are under your name, and how much outstanding debt you have. Both the questions and your credit report help the lender determine if the loan is a good fit for you.
In addition, the lender will help you create a budget by asking about your monthly after-tax income and expenses. Once you have shared the information about your earnings and typical expenses, the lender will have an estimate of how much money you have left over each month – this is known as your discretionary income. Based on this figure, the lender can work to set your monthly payment at an amount that you can afford and still have money left in your budget.
Getting a full picture of your financial situation through your credit application, credit history, and budget helps traditional installment lenders make the right loan for you. Other loan products, like payday, title and deposit advance loans do not determine your ability to repay – they simply give you a loan based upon the value of your paycheck or vehicle and can be dangerous.