Young People, the Banks Are Not Necessarily Your Friends

The following post is from Melissa Batai

Attention young adults with newfound financial freedom.  Please realize this as soon as possible.  The banks are not your friends!

Good Credit Score?  You’ll Get Approved for More than You Can Afford

If you’ve been responsible with your money up to this point and have a high credit score, you may be surprised to find that banks will be very generous to you.  They will happily saddle you with as much debt as possible.

If you’re like me, you probably have the misguided belief that banks want to make sure that you won’t get overextended, so they’ll limit the loan amount that you qualify for.  However, in my experience, I’ve found that belief to be grossly inaccurate.

For instance, two and a half years ago, my husband and I bought our first home.  We were both shocked to find that on our modest, one income, we qualified for a loan of $320k.  Let me tell you right now, there is absolutely no way we could have afforded the monthly payment on a loan of that size.  We ended up buying a house that was just a little more than half of the amount we were approved for.  To this day, I have no idea what the bank was thinking when they qualified us for such a high amount unless they were simply looking at our high credit scores.

Responsible?  The Offers Will Keep Coming

Last month, my husband and I went to the bank to see if we qualified for a car loan.  Because we have a house payment and student loan debt that eats up a fair amount of our monthly take home pay, I didn’t know if we would qualify.

Imagine my surprise when, once again, we qualified for a much larger car loan than I knew we could afford.  I had thought that the housing market was just different, which is why the banks had qualified us for so much, but obviously that’s not true because we qualified for a much bigger car loan than we could afford.

Consider All Factors to Know What You Can Afford

When you consider what you can afford, make sure to include all factors.  If you’re buying a house, consider the repair, maintenance, and insurance costs.  These could easily run a few thousand dollars a year, or $150 to $200 a month in addition to the house payment.  The same goes for a new vehicle.  In addition, you’ll have to consider gas and plates.

While having a strong credit record is important and beneficial, remember that what the bank says you can afford as a result of that high credit score is not ACTUALLY what you can afford.  There used to be a time when banks were very conservative with their loans, but clearly that time has passed.

You will need to be responsible and understand how much you can afford monthly and stick to that amount.  It’s easy to be enticed by a higher loan amount, but using the maximum you are allowed to borrow will likely put you in a miserable financial situation.

Is your experience like mine?  Have you routinely qualified for a larger loan than you know you can afford to pay?