How much one can borrow for a car loan?

When you’re faced with buying a car for the first time – or the fifth or sixth time – you are probably wondering how much you can afford to borrow from a car lender. Markets and interest rates go up and down, and so does your financial position. What may have worked a few years ago may not work now for various reasons beyond your control. So how do you arrive at a figure that is comfortable to borrow and won’t break your back? Let’s find out.

Budgeting and research

Before viewing cars online or in person, you must set a budget. How much can you afford monthly payments? Fuel and maintenance costs? Add this to your calculations. Look for cars with your “must have” features like storage, fuel economy (or performance!), satnav, etc. It can also demonstrate fiscal responsibility to lenders if you have bad credit.

Income and credit history

There are two major facets of your financial records lenders will look at first: your income and your credit history. Your current income will determine how much money a lender will let you borrow, otherwise known as your car loan borrowing power. The second – and possibly most crucial – aspect of your application is the health of your credit score. A high credit score means access to lower interest rates, while customers with below average scores may struggle to get approval, or only gain access to higher-than-average interest rates, due to their higher risk.

You should know your credit score before you get any type of finance. You can check your credit every three months for free. Visit the Office of the Australian Information Commissioner for instructions on how.

Having a deposit

If feasible, putting together a down payment or deposit for your car purchase helps you save on interest in the long term, as you won’t have to borrow as much money to pay for the car. (e.g., if you have a 20% deposit for a $40,000 car, you’ll only have to borrow $32,000.) If you don’t have the best credit, it demonstrates to brokers and lenders that you are responsible with your money, even if your credit score has yet to catch up. The minimum deposit you should aim for is about 10%.

Longer repayments = more interest

You may want to get behind the wheel of your dream car – and doing some creative maths, you can! If you accept a loan term of seven years instead of five and opt for a balloon payment at the end of the term. This means paying more in interest and coming up with 20-30% of the price of the car to settle the loan. It might look good on paper but can put you behind financially.

Being comfortable with security

Another way to save on your repayments is to opt for a secured car loan which uses your car as collateral. This reduces your interest rate, but also opens you up to risk of repossession if you ever fall behind on repayments. By getting the right financial advice, seeing a car loan broker instead of a bank, and doing your calculations in advance, you’ll be able to pay back the loan comfortably. Just don’t bite off more than you can chew!