Ready for a Bigger Loan? How Your Savings Account Paves the Way!

Saving money and getting big loans are closely connected. The UAE Central Bank shares that the savings rate went up by 3% in 2022. This depicts that people are becoming more aware of managing their money wisely.

The article will explore how having more money in your savings account can help you get larger loans. We will look at why banks trust you more when you have savings, how it helps your credit score, and how it can even get you better interest rates.

Three Pillars of Loan Approval: Seasoning, Balance, and Reserve

• Seasoned Savings - Banks appreciate a history of stable savings. They like to see that the money in your account has been there for a while, showing your steady financial habits. This is often termed as 'seasoned' savings. 
• Debt-Burden Ratio (DBR) - Your DBR is a measure that banks use to gauge your ability to handle payments towards any new loan. It's calculated by dividing your total monthly debt payments by your total monthly income. A lower DBR indicates a better balance between your income and debt, showcasing your ability to manage new loan payments alongside your existing financial obligations. 
• Cash Reserves Requirement - When planning for a big loan, especially for purchasing a home, having extra savings to cover initial costs like down payments and closing costs is crucial. But that's not all; banks also want to see that you have additional savings to cover future monthly payments, insurances, and other related expenses. 

How Hearty Savings Account Supercharge Your Loan Amounts?

The Trust Quotient

When you have a good amount of money saved in your bank account, it sends a positive signal to the banks. It tells them that you are responsible with money and have a habit of saving. This is important for banks because they want to be sure that you will pay back any money you borrow.

Now, let’s consider a simple example to understand this better:

 Imagine two people, Sarah and John. Sarah has AED 50,000 saved up in her bank account, while John has only AED 5,000. If both of them apply for a loan, the bank is more likely to trust Sarah over John because her savings show that she has good money management skills. 

So, having more money in your savings account builds trust with the banks, and this trust can increase your chances of getting a bigger loan. This trust is not just a one-time thing; it’s a solid foundation for a long-term relationship with your bank. Over time, as the bank’s trust in you grows, you may find it easier to get larger loans. 

Credit Score Climber

Your credit Score is like a financial report card. It shows banks how well you've handled money in the past. Having money in your savings account plays an important role in building up your credit score. When you have more savings, you have a safety net. This implies that if unexpected expenses come up, you won't have to miss loan repayments. Banks notice this and it can make your credit score go up.

For instance, consider you have a good amount of savings and you also have a car loan. Now, one month, your car needs some costly repairs. Because you have savings, you can use that money for the repairs and still make your car loan payment on time. On the other hand, if you didn’t have savings, you might have to choose between the repair and the loan payment. Missing a loan payment could lower your credit score.

As your credit score gets better, banks are more willing to give you bigger loans. They see a high credit score and think, "This person is responsible with money." So, a hearty savings account doesn't just give you a buffer, it can also pave the way to a better credit score, which in turn, opens up the possibility for larger loans. 

Interest Rate Interplay

Interest rates are a crucial part of any loan. They are what you pay extra for borrowing money. A lower interest rate means you'll pay less extra money over time. When you have saved a lot, banks may see you as a safer bet. They might offer you lower interest rates on loans as they are more sure you'll pay it back.

For example, suppose you want to buy a new car. If you have saved a lot, the bank might give you a loan with a lower interest rate compared to someone who hasn't saved much.

Over time you pay back the loan, a lower interest rate can save you a lot. It's like getting a lower price on borrowing money. A good savings account can help get you these lower prices on loan interest rates, making borrowing cheaper in the long run.

Down Payment Dynamo

A down payment is the upfront amount you pay when buying something big like a house or a car. The more you can pay upfront, the less you'll need to borrow. Having a good savings account helps you make a larger down payment, which in turn lowers the total amount you need to borrow.

Imagine you are eyeing a beautiful home in Dubai. The seller requires a down payment of 20%. If the home costs AED 1 million, that means you need AED 200,000 upfront. If you have been saving diligently and have that amount, you're in a good position. You can make the down payment and will only need a loan for the remaining AED 800,000. On the other hand, if you have not saved enough and can only afford a smaller down payment, you will need to borrow more. 

So, your savings account doesn't just help you meet the down payment requirements; it also reduces the loan amount you need, making the whole process more manageable and less daunting. 

Large Loan Amount

The amount of money you have saved can affect how much money a bank is willing to lend you. Banks often look at your financial stability when deciding how much to lend. Having more savings shows that you are financially stable and capable of managing money well. This can impress the bank and increase the amount they are willing to lend.

Imagine you are launching a business and require a significant loan for the initial funding. If you have a notable amount of savings, the bank might see it as a sign of  financial prudence and could be more open to extending a larger loan to propel your business forward. Conversely, if your savings are scant, the bank may question your financial solidity and might propose a smaller loan amount.

Your savings, in this case, act as evidence of your financial discipline and capability, potentially helping you to secure a larger loan for your business venture. This way, your savings account can play a crucial role in uplifting the loan amount you qualify for, helping you step closer to your entrepreneurial dreams.

Your Savings, Your Loan Ladder

Your savings are more than just a safety net. They are your stepping stone to bigger loans and bigger dreams. From buying a home to starting a business, a healthy savings account is your ally. It builds trust with banks, boosts your credit score, and can even get you better interest rates. Plus, a good down payment can lower your loan amount, making repayments easier. Whether you are eyeing a new car or a new home, your savings are working for you, opening doors to better loan terms and bigger loan amounts.

So, keep saving, it's the smart way to prepare for life's big expenses and to show banks you're ready for that larger loan.

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By: Nupur Jain