March 2023

How does debt affect your borrowing power?

Whether for personal use, purchasing a home or for a business purpose, you might seek to take out a loan to help pay off something or to purchase an item.

However, the amount of money that you can borrow from a lender through a loan can be impacted by the current amount of debt you may have.  It can even cause your loan application to be rejected.

So how is your borrowing power worked out against different types of debt?

Any outstanding debts or other financial commitments you regularly put your income towards could impact your ability to make repayments, which is why a lender will want to know these when determining your borrowing power.

The types of debt that might affect your ability to borrow for a loan could include:

  • Credit Card Debts
  • Existing personal loans
  • Secured car loans
  • Buy now, pay later debt (from using services like Afterpay, for example)
  • Other mortgage debt
  • HECS/HELP Debt

How Else Can I Improve My Borrowing Power?

Apart from earning a higher income, there are other ways to improve your borrowing capacity or serviceability:

  • Live within your means by cutting unnecessary spending on luxury items like entertainment and holidays.
  • Cut all unnecessary debts such as credit cards and make extra repayments to pay down existing debts like personal loans faster.
  • Be honest about how much you can afford to borrow and speak to your lender to crunch the numbers as to how big your repayments will be.

If you are concerned about the impact that existing debt may be having on your finances, it is best to speak to a debt counsellor or professional adviser for further advice in managing it.

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