Getting approved to borrow a certain amount doesn’t automatically mean you can comfortably afford it. A lender might decide that you qualify for a particular loan, but they don’t live with your monthly budget. You do. That’s why it’s worth working out your own borrowing limit before signing anything.
The process doesn’t need to involve complicated financial calculations. Start by looking at what you earn, what you genuinely spend and how much breathing room you want left each month. It’s also sensible to compare personal loan options rather than assuming the first offer with an affordable-looking repayment is necessarily the best fit.
The goal is simple: find a repayment amount that works alongside your existing lifestyle rather than one that forces everything else in your budget to revolve around debt.
Start With What Actually Comes In
Begin with your reliable take-home income. If you receive the same salary every month, this should be fairly straightforward.
Things become trickier when part of your income comes from overtime, bonuses, commissions or irregular work. Rather than calculating affordability based on an unusually good month, use an amount you can reasonably expect to receive consistently.
For households with multiple incomes, consider whether both are likely to remain stable throughout the proposed loan term.
Find Out Where Your Money Really Goes
It’s easy to underestimate monthly spending when working from memory. Pull up your bank and credit card statements from the past few months and look at the actual numbers.
Your budget should account for expenses such as:
- Rent or mortgage payments
- Groceries and household essentials
- Utilities and phone bills
- Insurance
- Transport
- Childcare or education
- Existing debts
- Entertainment and subscriptions
Don’t forget expenses that only appear occasionally. Car servicing, medical appointments, home repairs, gifts and annual subscriptions still need to be paid for. Converting these into average monthly amounts will make your budget more realistic.
Don’t Commit Every Spare Dollar
Imagine you take home $5,500 each month and typically spend $4,200. On paper, that leaves $1,300.
That doesn’t mean a $1,300 monthly loan repayment is affordable.
Doing so would leave nothing for savings or unexpected expenses. A broken appliance, car repair or unusually expensive utility bill could immediately create financial pressure.
Instead, decide how much of your remaining income you’re genuinely comfortable committing. Maintaining a buffer can make the difference between a repayment that feels manageable and one that becomes stressful.
Look Beyond the Monthly Repayment
Monthly repayments are useful for budgeting, but they don’t tell you everything about the cost of borrowing.
A loan with smaller repayments might initially look more affordable simply because the debt is being repaid over a longer period. Depending on the loan terms, that can mean paying more interest overall.
When assessing an option, consider:
- The interest rate
- Upfront and ongoing fees
- Repayment frequency
- Loan term
- Total amount repayable
- Conditions around additional or early repayments
Looking at the complete picture helps you avoid choosing a loan based solely on the most attractive monthly number.
Stress-Test Your Budget
Before deciding what you can afford, try running your budget through a few realistic scenarios.
What happens if your grocery bill increases? Could you manage the repayment if your car suddenly needed repairs? What if you had a month with lower-than-usual income?
You don’t need to prepare for every imaginable financial emergency. You’re simply checking whether your budget has enough flexibility to absorb normal surprises.
If one unexpected bill would leave you struggling to make a repayment, borrowing less may be the safer choice.
Choose Your Limit Before You Apply
Once you’ve worked through your budget, decide on the maximum repayment and total debt you’re comfortable taking on.
Setting this limit beforehand is useful because borrowing decisions can change once money is actually offered. Being told you’re eligible for more than expected can make it tempting to increase the amount, even when you don’t really need to.
Remember, your maximum approved amount and your comfortable borrowing amount are two different things.
A good loan should allow you to achieve your goal without making everyday finances unnecessarily tight. Leave yourself room to save, deal with unexpected expenses and enjoy your normal life. Ultimately, the right amount to borrow is not the most you can get — it’s the amount you can comfortably afford to repay.
