A loan is a sum of money on which interest is paid. You also pay costs to the lender, including administration and repayment costs. These costs must be paid in full within the duration of the loan. The lender will therefore calculate the monthly costs you can incur to pay off a loan. A maximum loan can be calculated based on this.
If you can repay € 500 per month, of which € 100 consists of interest and other costs, you will be able to repay € 4,800 (12 x € 400) annually. In combination with the duration of the loan, for example 5 years, it is determined what amount is linked to the maximum loan. In this calculation example, the maximum loan is 5 x € 4,800 = € 24,000.
There are different numbers within this formula that are influenced by your personal situation. Consider the duration: not every loan has a duration of 5 years. For example, the duration of a mortgage is between 20 and 30 years, so that the maximum mortgage is also higher than the average loan. And then there is the monthly repayment. This is calculated specifically on the basis of your financial situation, and is related to your monthly income, expenses and disposable income.
It sounds very attractive to go straight for the maximum loan: if you currently have enough money to repay it every month then it seems like a good idea to go for the maximum amount. After all, you have enough income to pay the repayment month after month and thus continue to pay off the loan.
But that does not mean that you must immediately go for the maximum loan. It is sometimes better to take a step back and find out what amount you need. It is better to borrow too little and borrow an extra amount afterwards than to take the maximum amount in advance and borrow too much. Because a loan that is too high comes with considerable extra costs, so that you will spend a higher amount each month and therefore also have less money left over.
Think back to the calculation example given above. Based on the monthly repayment and the term, it has been calculated that the maximum loan is € 24,000. And if you need € 20,000 in this situation, it is a shame to borrow this € 4,000 as an extra. You pay continuous costs on this € 4,000, which means that you lose extra money every month. In addition, it takes longer for the total loan to be repaid, because you need 20% more time to repay the loan. It is therefore not worthwhile to borrow this € 4,000 extra, because there are only extra costs involved.
With a loan it is always better that you borrow too little than too much. You must make a cost estimate in advance and then look at the options that exist. The maximum loan is not always interesting, and it is a waste of the extra costs.
If you do not yet have a clear picture of the total costs that you are going to incur – and which you want to cover by taking out a loan – then it is smart to opt for a revolving credit. In this case you will receive a maximum loan, but will only incur costs for the amount that you take out. If you have a maximum revolving credit of € 24,000 and you withdraw € 20,000 of this to cover costs, you do not pay for the extra € 4,000 that is currently in the books as revolving credit. This saves a lot of money and at the same time offers the option – when it is necessary to borrow – to borrow more quickly.
Always make a well-considered choice when you take out a loan. It sounds particularly attractive to immediately borrow to the maximum in order to have a large amount. Yet it is often financially justified to opt for a smaller loan or take out a revolving credit.