One of the most common questions we get asked by borrowers seeking a car loan is, how much can I borrow? In this guide we walk you through exactly how to calculate your borrowing power and show you how lenders determine your borrowing capacity.
Borrowing capacity is basically the total amount a lender will allow you to borrow. Knowing exactly what your borrowing limits are before you apply for a car loan can help you determine car loan affordability and avoid the disappointment of declined finance enquiries and damage to your credit score. Let me explain.
Every time you submit a car loan application to a lender it will appear on your credit file. Your credit report will show both the number of finance applications you have made and the outcome of those applications.
If you don't understand your lending capacity and apply for loan amounts that, given your financial situation, are unrealistic, these will appear as declines on your credit record. Too many declined finance enquiries on your report often serve as a red flag to lenders and can damage your credit score.
While there is not a standard borrowing capacity formula used by banks and other lenders to calculate how much you can borrow, most lenders base their capacity judgements on similar sets of rules. These rules will take into consideration your income and spending on essential household expenses like food and utility bills, your discretionary spending on things like dining out and entertainment and your spending on lifestyle like holidays and household assets.
To calculate your borrowing power lenders will compare your spending habits against your income to work out your borrowing capacity or loan affordability.
The easiest way to determine your car loan borrowing power is to use our simple, two-minute finance enquiry form. The form is an enquiry to our broker team and will not be submitted to the lender without your consent or affect your credit score. When you complete the form we will be able to provide you with accurate answers to your car loan capacity questions and match you with the best lender for your needs and circumstances.
Capacity is your ability to meet the weekly or monthly repayments on the loan amount. When you are declined car finance due to capacity it basically means one of two things. Either your expenses are too high to demonstrate the ability to pay or the amount you wish to borrow is too large given your financial status.
1. Use our loan calculator to determine what your repayments would be on the loan amount you are considering. Next check your expenses to ensure you have sufficient funds after all expenses are paid to service the loan. Your goal is to show lenders that you can meet the repayments comfortably.
2. Be realistic about the type of car you can afford to buy and where necessary adjust the amount requested on your finance application to match what you can reasonably afford.
3. While not essential, having a deposit of at least 10% of the car's value can help demonstrate responsible financial management and capacity to service the loan.
4. Reduce your credit card spending and try to get your credit card balance below 30% of the limit on your credit card. Why?
5. Ensure that you are meeting all of your existing loan and utility commitments by paying on time and in full. When you are late with bill payments or default on existing loan repayments lenders view this as a red flag.
6. Finally, demonstrating capacity is about showing you have good financial management. Lenders will request, at a minimum, 3 months of bank statements. They will use the bank statements to correlate your declared income and expenses against how much you actually earn and spend. Our advice is to keep your spending to a minimum for 3 months prior to applying for a car loan so that your bank statements reflect good financial management.