Can I ask for a loan in my situation? This is one of the most common doubts in our community. To find out, it is essential to understand what a family’s borrowing capacity is and pay special attention to the 35% rule applied by banking entities. How to know if I have reached my debt limit?
What is the 35% indebtedness rules?
The Bank of Spain advises that the debt that a Spanish family, better known as indebtedness, can assume, does not exceed 35% of its income. To understand this concept, we must first know what is the most common distribution of income in a family: essential expenses, indebtedness, and savings.
The theory that we are going to develop next establishes what percentage of our income is what we should devote to each of these elements. In addition, this theory has a variant, the so-called 50/20/30 rule.
50% for essential expenses
Most of a family’s monthly income goes to cover basic needs or essential expenses, which we can divide into four large groups:
- Food expenditure
- Transportation Expense
- Miscellaneous expenses: clothing, leisure, sport …
- Miscellaneous expenses of the children: clothes, school, extracurricular activities.
30-35% of indebtedness (maximum)
The indebtedness of a family is defined as the set of monthly installments that are paid for the money borrowed by a financial entity. On the other hand, the capacity of indebtedness is defined as the limit of debts that a family can bear without risk of default or default.
As we have already advanced, certain official bodies declare that a family cannot borrow more than 30-35% of their income. With this rule, we would avoid acquiring more debt than we can pay. In this group, we would include the concepts of mortgage payments, rents, credit cards or personal loans.
Indebtedness per se is neither good nor bad, as long as we are within the limits mentioned above. The lower the indebtedness of a family, it will enjoy greater financial health and may devote that part to other concepts, such as leisure or saving.
In all family planning, we must allocate a portion of our monthly income to savings. This point is just as important as the previous ones since we must have a long term thought in our finances, with the aim of having a financial cushion in order to face unforeseen events.
Families that save less than 10% of their monthly income may have a serious liquidity problem and should begin to consider cutting expenses from the previous 2 groups. On the opposite side, a person without family charges and being disciplined enough could increase this percentage up to 50% and work towards guaranteeing a future.
How to calculate my current borrowing capacity?
If you are in the process of requesting financing, financial institutions have an automatic system to find out if you are eligible or not to request a loan with your current financial situation. However, you can calculate your borrowing capacity yourself by following this formula:
- Debt capacity (CE)
- Total income: payrolls and returns on other products such as deposits, apartments for rent or investments in securities.
- Fixed expenses: rents or mortgages, other loans, recurring receipts (school or supplies).
Let’s give a practical example. If the income of a family is $ 2,500 and you have fixed expenses of $ 1,000, your borrowing capacity is $ 1,500 x 0.35 = $ 525. The monthly fee limit for this family would be $ 525 among all loans.
If I am already in the debt limit, can I ask for a loan?
As a general rule, no bank or financial credit institution will grant you a loan if there is any risk of default by the customer. Exceeding the 35% debt limit is one of these cases, as are being in Credit Checker or having a negative credit history.
However, there are certain lenders that allow you to request financing despite exceeding the debt limit: fast loan platforms. Fast loans or credits are short-term loans (between $ 50 and $ 1,000) and short-term loans (to be repaid from 1 day to 2 months) that serve to get out of trouble at a specific time.
Being such a small loan, these types of companies do not pay if the applicant is at their limit of indebtedness. However, the applicant must be aware of their limitations and whether the request for this loan will help solve that problem or not.