Figuring out how much of a loan to take out can be tricky. On one hand, why take out more than you need and spend extra on interest? On the other hand, you wanna take out enough to cover your expenses and still live within your means. Below is a breakdown of how to figure out the right number to look for.
Question
Hi Experts,
Thank you, Violet
I’m looking to take out a personal loan, but I want to understand how much I can realistically afford beyond what a lender may approve me for. I’m concerned with how a new monthly payment would fit into my overall budget, especially alongside other debt obligations.
Are there expert guidelines for keeping personal loan payments manageable while avoiding overborrowing? What steps or calculations can help ensure a personal loan covers what I need without adding financial strain?
Toronto, ON
Answer
Hello Violet,
That’s a common question, and an important one at that. Knowing how much you can realistically afford is essential. It will ensure that you don’t take out more than you can handle. While lenders base approvals on factors like credit score, income, and debt-to-income ratio, they don’t take into account your savings goals, emergency fund needs, or other financial priorities. As a result, they may approve you for more than you can actually manage in your personal budget.
Ultimately, your personal loan amount comes down to your budget, cash flow, savings goals, and overall financial plan. Not just what a lender will approve.
What do your monthly income and expenses look like?
To calculate a realistic loan amount, you need to know what your monthly income and expenses look like. To figure that out, follow these steps:
- Calculate all your fixed costs: This can include rent or mortgage, utilities, insurance, and minimum debt payments.
- Estimate your variable expenses: This can include things like food, transportation, entertainment, and subscriptions.
- Calculate your free cash flow: Subtract your total expenses from your monthly income to see what’s left. This is the amount you can safely allocate toward a loan payment and other financial goals.
| Example: Monthly earnings: $4,000/month Fixed costs: $2,200/month Variable spending: $1,000/month Free cash flow: $800/month In this example, even if you have $800 available for a new loan, it doesn’t mean you should use it all. You should leave a buffer for unexpected costs and make sure you’re still contributing to savings and an emergency fund. Using the entire $800 on loan payments can leave you financially stretched and vulnerable if unexpected bills arise. |
What’s a comfortable monthly loan payment amount you think you can handle?
A comfortable monthly loan payment is one that fits easily into your budget without creating stress or limiting your ability to save. Here are a couple of ways to help determine a monthly loan amount that you should be able to handle:
The 10/15 rule
It’s recommended to keep your personal loan payments to no more than 10% to 15% of your take-home pay. This helps ensure you’re not overextending yourself. For example, if your net monthly pay is $4,000, keep loan payments somewhere between $400 to $600 per month.
Keep payments under your leftover amount
Another way to gauge affordability is to keep the payment well within your leftover budget after covering essential expenses. That way, you still have room for savings and emergencies. Using the above example, you would ensure that your loan payments stay well under $800 per month.
Don’t forget emergency savings and financial goals.
When deciding how much you can realistically afford to borrow, it’s important to look beyond the monthly payment and consider your financial cushion. Here are a couple of guidelines to follow to ensure you leave enough left over to set aside for savings and an emergency fund:
Maintain 3-6 months of living expenses
A key guideline is to have between 3 and 6 months of living expenses in an emergency fund. This helps ensure that unexpected events such as a job loss, medical bill, or car repair do not push you deeper into debt.
Keep enough to continue with long-term savings goals
Your loan payment should also leave enough room in your budget to continue saving for retirement, major purchases, or other long-term goals. If a loan limits your ability to build savings or forces you to stop contributing to important financial plans for the future, it could be a sign that the loan amount is too high.
Consider fluctuations in expenses and income.
When figuring out how much you can realistically afford to borrow, it’s important to account for the fact that your income and expenses won’t always stay the same. Costs like groceries, utilities, transportation, or insurance can rise unexpectedly, and your income could also fluctuate due to reduced hours, seasonal work, or changes in commissions or bonuses.
To protect yourself, consider leaving a buffer, typically 10–20% of your disposable income, so you’re not relying on every dollar to cover your payment. This cushion helps ensure that even when expenses rise or your income drops, you can still cover your loan comfortably without having to give up on savings or fall behind on other debt obligations.
| Rule of thumb: Borrow only as much as you can comfortably repay without touching emergency funds or sacrificing your other financial goals. If a loan pushes your budget tight, it’s too much. |
How much can you realistically afford?
Once you’ve assessed your income, expenses, and savings goals, you may determine that out of your $800 in available cash flow, $400 can comfortably go toward loan payments.
From there, a loan calculator can help you see how different loan amounts, interest rates, and terms will affect your monthly payment so you know what fits your budget.
Simply enter the loan amount, interest rate, and loan term, and the calculator will show your estimated monthly payment so you can compare it to your $400 budget.
Example:
| Loan Amount | Interest Rate | Loan Term | Estimated Monthly Payment |
| $4,500 | 10% | 12 months | ~$395.62 |
| 12,500 | 30% | 60 months | ~$404.42 |
The loan amount you can get depends on the loan’s interest rate and the terms you qualify for. For example, a $4,500 loan at 10% interest over 12 months results in a similar $400 monthly payment as a $12,500 loan at 30% interest over 60 months.
Next steps
Finding the right loan isn’t just about what you qualify for. It’s also about making sure the loan payments comfortably fit your budget and suit your long-term plans. Before applying, be sure to comparison shop with lenders online to see what’s offered side-by-side to find the best rate for the loan they need.
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