How much should I borrow with a loan?

Assess your financial situation 

Before deciding how much to borrow, it’s important to fully understand your current financial situation. This will help you see how much debt you can manage. Here are some steps to get you started: 

Calculate your monthly income 

This includes your salary, side earnings, and any other consistent sources of income. Knowing your net income (after tax) will give you a better picture of what you can afford to repay each month. 

Track your expenses 

Make a list of all your monthly expenses, including:  

• rent or mortgage 
• utilities 
• existing debts 
• groceries 
• transportation 
• insurance 
• any other recurring costs.  

This will show you how much of your income is already committed to regular spending. Make sure to factor a portion of anything you pay yearly, e.g. if you pay your home insurance annually, divide that figure by 12 so it’s included in your monthly costs. 

Calculate your disposable income 

Take your regular spending out from your net income to determine how much is left over. This will be your disposable income. This figure will indicate how much you may be able to afford to put toward loan repayments. Bear in mind, if your loan is for consolidating existing debts, you can take those out from this figure too. 

Think about why you’re borrowing 

Loans should always have a clear and specific purpose. Knowing what you need the money for will help you decide how much you should borrow and make sure you don’t over-borrow.  

Below are some common purposes that people take loans out for: 

Home improvements: Try getting quotes for the cost of materials and labour. Make sure to factor in some flexibility for unexpected surprises. 

Debt consolidation: Calculate the total amount of your existing debts that you wish to pay off. When deciding which debts to consolidate, consider how long they are likely to otherwise run for, and what you’re currently paying in interest. 

Large purchases: Whether for a car or holiday, ensure you only borrow what you need, taking into account any savings you can contribute. 

Borrow what you can afford, not what you're offered 

Just because you qualify for a large loan doesn’t mean you should take it. Lenders may offer you more than you need, but this can lead to higher monthly payments and increased financial pressure. Focus on borrowing what you can afford while thinking about your future stability. 

While it may be tempting to take out a larger loan based on your current earnings, it’s important to think about future uncertainties.

A sudden change in your income or unexpected expenses could make it more difficult to pay back your loan.

Understand the loan terms 

The terms of the loan, including interest rates and repayment periods, can significantly impact how much you should borrow. 

Interest rates 

A higher interest rate will increase the total cost of the loan, so it’s crucial to factor this in when deciding how much to borrow. Opting for a lower interest rate, when possible, can help make larger loan amounts more affordable. 

Loan term 

Shorter-term loans may have higher monthly payments but will save you money on interest in the long run. Longer terms may mean lower monthly payments, but will increase the total cost of the loan due to accumulating interest. 

Fees and other charges 

Be mindful of any set up fees, early repayment charges, or other costs associated with the loan. These can affect how much you’ll need to borrow. 

Alternatives to a loan 

Before applying for a loan, you may want to explore alternatives that could reduce the amount you need to borrow or eliminate the need for a loan altogether: 

• Savings: Can you cover part of the cost with your savings? 
• Payment plans: If borrowing for a purchase, check if the seller offers a payment plan with little or no interest. 
• Credit cards: You may find borrowing a smaller amount on a credit card is more suitable for your needs. 

Borrow responsibly 

The right amount to borrow is based on your financial situation, your needs, and what you can afford. By carefully assessing your income, expenses, and loan terms, you can make a well-informed decision that allows you to achieve your goals without straining your finances. 

If in doubt, consider consulting with a financial advisor to ensure you’re making the best borrowing decision for your circumstances.  

Always remember: borrow only what you need, and never more than you can afford to repay.