Your borrowing power refers to how much credit you can get based on your financial history, including your credit history and score. Having strong borrowing power is essential if you ever want to get a mortgage, car loan, personal loan, or any other type of financing. It can also help you qualify for loans and credit cards with more favorable rates and terms. What follows are 10 effective strategies to boost your borrowing power and increase your financial opportunities.
Key Points
• To improve borrowing power, check credit reports for errors and inaccuracies.
• Pay bills on time, and keep credit card balances low.
• Show financial stability with a steady job and income.
• Increase income to improve debt-to-income ratio.
• Offer collateral to reduce lender’s risk.
How to Boost Your Borrowing Power
Whether you’re interested in borrowing money to make a major purchase or using a personal loan to consolidate high interest debt, here are some simple ways to increase your borrowing capacity.
1. Check Your Credit Reports
Lenders determine how much they will lend you (and if they will lend to you at all) primarily based on your credit score and history. So a great first step is to get copies of your three credit reports, and read each one over carefully. This allows you to see where you stand, as well as check for any mistakes or inaccuracies (like payments marked late when you paid on time or someone else’s credit activity mixed with yours).
You can request free copies of your credit reports from three major credit bureaus — Equifax®, Experian®, and TransUnion® — through AnnualCreditReport.com . If you find any errors, you’ll want to file a dispute with the appropriate credit agency.
2. Be a Responsible Borrower
To show creditors that you are a safe bet, you’ll want to make sure you pay all of your bills on time. Also try to keep your credit card balances low — this impacts your credit utilization ratio (the percent of available credit you are actually using), which has a significant impact on your credit score. To calculate your credit utilization, add up all of your revolving credit balances and credit limits, divide your total balance from your total limit, and multiply that number by 100 (to get a percentage). Ideally, you want to keep credit utilization below 30%.
3. Show Financial Stability
Stability and consistency in your financial and employment history can bolster your borrowing power. Lenders generally prefer borrowers who maintain a consistent residence and have a steady job and a reliable income source. This showcases your reliability as a borrower and boosts your chances of getting approved for loans with favorable terms.
4. Consider a Co-Borrower
If your individual borrowing power is limited, using a co-borrower (such as a spouse or a family member) can significantly enhance your chances of loan approval. A co-borrower is a joint applicant who shares ownership of the loan and responsibility for payments. (This is in contrast to a cosigner, who is only liable for the loan if the primary borrower fails to make payments.) Depending on the co-borrower’s income, they may be able to help you qualify for a higher loan amount, as well as better rates and terms.
5. Shop Around
Lenders vary in terms of how much they loan out, and to whom, so it’s a good idea to explore multiple lenders, including traditional banks, online lenders, and credit unions, and compare loan options before making a decision. Some lenders will allow you to “prequalify” for a loan, which can give you a good idea of how much of a loan they will offer you and at what rate. This only requires a soft credit check and won’t impact your credit score.
6. Pay Down Existing Debt
Reducing your existing debts can have a positive impact on your credit score. Not only that, it enhances your debt-to-income (DTI) ratio, a key factor considered by lenders. Your DTI ratio measures how much of your monthly gross income goes toward debt payments. This gives lenders insight into your ability to make another monthly payment and how large a payment you could handle.
To calculate your DTI, add together your fixed monthly payments (like mortgage/rent, auto loans, credit cards, and other personal loans), then divide that number by your gross monthly income (the amount you earn before taxes and other deductions). As a rule of thumb, lenders prefer a DTI ratio of 35% and under to approve you for a loan.
7. Increase Your Income
Another way to improve your DTI is to increase your income. Even if you have a large amount of debt, a high enough income can often offset it. As long as you have enough money coming in to handle your current debt and take on a new loan, a lender may not cap how much you are able to borrow.
If you have some time before you need to apply for a loan, you might look into ways to bump up your income, such as taking on a side hustle, asking for a raise, or looking for a new job that pays a higher salary.
This could help you qualify for a larger loan amount when, say, applying for a mortgage or wedding loan.
8. Don’t Leave Any Income Out
As mentioned above, your income plays a key role in how much you can borrow. So you want to be sure to include all sources of income, including:
• Monthly salary
• Alimony
• Child support
• Side-gig income
• Rental income
• Investment property income
Including all of your income can lower your DTI ratio, increasing your borrowing power.
9. Consider a Longer Loan Term
Generally, the longer your loan term, the lower your monthly payment. A longer loan term — and lower monthly payment — may allow you to borrow more money with less impact on your DTI ratio, giving you eligibility for a larger loan. However, you’ll want to keep in mind that extending the term of a loan typically means paying more in interest over the life of the loan, increasing your total borrowing cost.
Recommended: Personal Loan Calculator
10. Consider Offering Collateral
You may be able to borrow more with a secured vs. an unsecured loan. With a secured loan, you put up something valuable (such as property, a vehicle, or a savings account) as collateral. The lender can take possession of this collateral if you fail to pay back loan funds as agreed. This lowers risk for the lender and, as a result, they may be willing to offer you a larger loan and/or a lower rate. If you’re already offering collateral, offering something of more value might boost the amount you’re approved for.
The Takeaway
If you’re thinking about applying for a loan for a large purchase, to consolidate other debts, start a business, or for any other purpose, it’s a good idea to look into ways to improve your borrowing power. You can start doing this right away by reviewing your credit reports, staying on top of your bills, paying down debt, using only a portion of your credit card limits and, if possible, boosting your income.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
How do you increase borrowing power?
Ways to increase borrowing power include building your credit history, reducing debt, and increasing income, among other tactics.
What influences borrowing power?
Savings and assets impact your borrowing power as they can contribute to your financial profile and the amount you are seeking to borrow. Other factors can include loan type and term. You are likely able to borrow a small loan more easily than a large one, as it represents less risk to the lender.
Do people borrow more when rates are high?
Typically, when interest rates are high, it’s more expensive to borrow money. For this reason, people may borrow less vs. more.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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