Many clients, even before visiting bank branches, want to know if they have a chance to get a loan, and what maximum amount they can count on. The main factor influencing the solution of this issue is the solvency of an individual, his financial capabilities. In this article we will try to tell you in a simple and accessible language how the solvency of a borrower is assessed and what the maximum allowable loan amount depends on.
Borrower’s income and loan amount
As already mentioned, to assess the creditworthiness of the borrower, banks analyze and take into account many factors. We told earlier about some of them, for example, about a credit history. Other parameters of interest to financiers, as a rule, are included in credit scoring (the nature of the client – education, the presence of children, experience, etc.). But still the main criterion, on which it directly depends, whether you will be denied a loan or not, is your financial capacity.
Earlier, in the pre-crisis period, banks were not so strict with the analysis of borrowers. In their calculations, they took into account unconfirmed sources of income, used less stringent methods for calculating the maximum possible loan amount. Today, the situation has changed and banks have become much more strict in assessing the financial capabilities of their clients. The main documents confirming the solvency of an individual are the employment record and a certificate of salary.
As we have already said, when calculating the maximum allowable loan amount, financiers use the concept of solvency, i.e. the ability of a person to fully and timely fulfill the payment obligations undertaken to creditors and budgets of all levels at the expense of the financial resources at his disposal. The easiest way to assess your own solvency is to calculate the difference in monthly income and expenses and compare the resulting value with the size of the monthly loan payment. Naturally, if the balance is lower, you will have to either refuse the loan or agree to reduce it.
Some banks use other schemes, for example, they assume that the repayment amount should be no more than 1/2, 1/3 or 1/5 of the amount of the borrower’s monthly income, and they are repelled by these numbers. Others assume that after all payments on their obligations (including loans) are made, the borrower should still have about 20-30% of available funds. These techniques came to Russia from the West, where the notion of “financial comfort” is popular: a person should not feel financial pressure, then he can work quietly and pay his loan. If most of the income goes to repay the loan and the borrower has to literally refuse everything in himself – this depresses him, he begins to work worse and as a result may refuse to pay the debt altogether.
Regardless of the chosen scheme for calculating the maximum possible amount of a monthly loan payment, in which the borrower can repay it without detriment to his budget, the bank operates with the concept of “net income”. This value is calculated as the difference between documented income and average fixed costs. Costs may be as follows:
- monthly payments on previously taken loans;
- utility payments, incl. payment of telecommunications services;
- taxes paid (including movable and immovable property);
- payment for education;
- alimony and other payments under the writs of execution;
- payments under insurance contracts;
- other payments.
Each bank develops its own scheme for calculating the maximum allowable loan amount and monthly payment, and also establishes their dependence on the amount of income received using special coefficients. In more detail about these formulas, we describe below.
Calculation of the maximum permissible monthly loan payment
Consider one of the most popular algorithms for determining the borrower’s solvency and calculating the maximum allowable loan amount, based on the value of his monthly income. So, after the bank specialists receive the documents confirming the borrower’s income and his profile, in which the client indicates all his expenses, the financiers perform the following operations:
- determine net income (total income minus expenses);
- calculate the maximum allowable monthly payment ;
- based on the value of this payment, determine the maximum possible loan amount and term.
The overwhelming majority of banks assume that every month a client can spend on repaying a loan not all net income, but only part of it. In addition, each financial institution sets its own solvency ratio, or correction factor (K p). The maximum monthly payment is calculated by the formula:
EP = D h * K p where
TU – maximum monthly payment;
D h – net income.
At the same time, the solvency ratio, depending on the financial institution and the type of lending program, varies from 0.4 to 0.7. As a rule, with mortgage lending (mortgage or car), financiers assume that a client may spend most of his net income (fear of losing collateral) to pay off debt, while the situation with unsecured loans is different. The risks are higher for them, so banks set up a repayment schedule in such a way that customers have at least 50% of available funds after making a mandatory monthly loan payment. Also, the value of the correction factor may depend on the size of the borrower’s income. For example, if your salary is less than 15 thousand rubles, the “amendment” will be 0.3; with income from 15 to 25 thousand rubles. the coefficient will be equal to 0.5; and with incomes above 25 thousand rubles. – 0.6.
It should be noted that when calculating the average costs are not taken into account expenses for accommodation (food, clothing, purchase of essential goods, medicines, etc.). That is why the amount that remains with the borrower after paying off the loan and other regular payments should not be less than the subsistence minimum (some organizations themselves set the minimum and prescribe it in the credit policy).
An approximate calculation of the loan amount and repayment schedules in accordance with your individual conditions you can do in
Recently, we considered the loans offered by banks. Now we will focus on what the maximum amount of consumer credit is available for individuals and how to calculate the loan amount on salary.