Affordability versus Approval
When you’re approved for a loan or a line of credit oftentimes the lender will offer you an amount that is actually higher than what you requested or expected. For example, if you apply for an auto loan through your bank and ask for $20,000 you might be pleasantly surprised when the application comes back approved for $35,000.
Lenders use various methods in order to figure out how much to approve an application for. If your debt-to-income ratio is low and your credit score is high then you shouldn’t be surprised when lenders try to get you to take a higher amount than you originally asked for. Remember: The more money you borrow from the lender, the more money you will eventually pay back in interest.
There is a big difference between what your lender wants to approve you for and how much you can actually afford. Just because your lender thinks that you can comfortably afford a certain payment doesn’t mean you can. Remember that lenders usually only include items listed on your credit report when considering your debt obligations. Unless you tell them, they don’t really know how much money you spend for utilities, childcare costs, insurance premiums, and any other recurring financial obligations.
The next time you get approved for an amount beyond what you think you can comfortably afford do not automatically assume that the lender knows best and max out the offer. Instead, take a close look at your finances and decide for yourself if you can afford to borrow more money than you originally intended on borrowing. Find out what the payment would be if you accept the full amount and factor it into your current budget to see how it will all work out. Does it squeeze your budget too much, or is it still doable?
Then again, if you have already decided how much you need for your purchase - whether it’s for a home, a car, or something else - then why take even more? Don’t allow the lender’s apparent generosity as a sign that you need to spend more than you originally planned on spending. If you’re making a major purchase than you should already have an idea of how much you want to spend, and allowing your lender to compel you to spend even more probably isn’t a good idea.
