Never Take The Full Amount Offered To You In A Loan

Never Take The Full Amount Offered To You In A Loan
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If you’ve ever applied for a student loan, a car loan or a home loan, you know that financial institutions will give you a total amount of money that they will lend you and let you shop around from there. Remember, you don’t have to take all of the money offered.

Picture: Omar Bárcena

This might seem like common sense; a bank issues you a car loan for $15,000. That means you can afford a $15,000 car, right? Not really. Your budget isn’t determined by how much someone will loan you. It’s determined by how much you can pay back. The Art of Manliness explains how this applies to student loan debt as well:

Before school starts, you’ll get a letter telling you how much in student loans you’ve been approved for. You don’t have to accept the full amount. Take a look at your whole financial situation and decide how much you need to make it through the college year. Many students take the full amount and use what’s left over after tuition and books as spending money. But if you work while you’re going to school, you won’t need to do that.

If you take out more money than you really need, you’ll need higher monthly payments to pay a loan off on time. However, if you can afford that higher monthly payment, then paying that amount towards a lower balance means your loan will be paid off sooner and with less interest. Banks know that the more they loan you, the more interest they can make back, but that doesn’t mean you have to accept that offer.

What Every Young Man Should Know About Student Loans [The Art of Manliness]


    • It’s the same with home loans over here though. Back when my partner and I had grad jobs fresh out of uni (on approx $50k p.a. each), we got approved for a home loan worth $770,000! We bought an apartment worth $550,000 and though we were making repayments comfortably, we were by no means living in luxury. I hate to think what would’ve happened if we actually took out a loan for the entire sanctioned amount!

      • It was more about not having bank loans and having HECS or whatever it is called now.
        But yeah, we got approved for stupid amounts for our home loan as well. No way would I have taken it all.

  • It’s always a good idea to take less. Then later on, if you decide to take a holiday, or extend, or need extra money, you know you’ll be able to without too much hassle.

  • It’s only ever in the interest of the finance company to loan the full amount, especially if you can’t actually afford payments, lots of fees and extra interest for them when you fail to pay. And they will go to any lengths to convince you to borrow. Car finance guy tried telling me I was better off borrowing full price over 7 years instead of the 40% I actually needed over the 2 years I wanted to pay it in. According to his theory, I’d be better placed having my large deposit still in the bank earning interest after 7 years. Needless to say, we did not finance with the car company.

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