How much can you borrow for a car loan?

22 Feb 2022

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If you’ve been searching the market for an upgrade from your current car, or your first ever new vehicle, it’s absolutely essential to determine exactly how much you can borrow for the purpose of a car loan. 

Further than that, though, it’s perhaps more important to find out how much you can afford to borrow for the purchase of a new car, to ensure that you’re not over-extending your borrowing capacity. While the purchase of a new car is undeniably exciting, it’s essential that you’re making a sensible financial decision and purchasing within your means. 

Thankfully, that’s what we’ll be covering today, as we first take a look at the new car landscape here in Australia in 2022, and uncover some essential information about your borrowing capacity, how lenders determine your suitability for a given amount, and how you can get better interest rates and terms on your next car loan. 

New and Used Car Prices in 2022 

As it stands, the prices of new and even used vehicles here in Australia are being heavily influenced by the tail-end of the Covid-19 pandemic, and have been exacerbated by supply chain disruptions and shortages of key components for modern cars. 

To make things worse, shortages of the microchips that are widely used in absolutely every modern car have caused further production slowdowns and delays for the delivery of a number of popular cars. 

Does that mean that 2022 is a bad time to purchase a new or used car? Well, not necessarily. Thankfully, production rates from manufacturers have been steadily increasing as they sort out their supply chain issues. 

This means that as supply increases, prices are set to, at the very least, stabilise in the short term, and likely to decrease in the medium to long-term as the competitive nature of the automotive manufacturing scene returns to business as usual. 

What Influences My Borrowing Power for a Car Loan? 

The main aspect that influences just how much money a lender will allow you to borrow for the purchase of a new or used vehicle is your credit rating. This, combined with things like whether or not you’re a first-time borrower, your monthly income and living expenses, as well as the type of loan will determine your borrowing power for a car loan. 

  • Age

  • Income 

  • Nature of employment & employment status 

  • Any current debt

  • Downpayment 

  • Credit score 

  • Credit history 

  • Debt-to-income ratio 

  • Collateral provided for the loan

  • Family size or number of dependents 

  • Type of loan

  • Loan Terms and Length 

  • Whether or not you’re a first-time borrower 

How Do Lenders Assess Your Borrowing Capacity? 

As you can probably imagine, large financial institutions and lenders have sophisticated and accurate means of assessing your borrowing capacity for the purchase of a new or used car. While this likely changes from lender to lender, at its core, this is a simple recipe that is designed to assess how much risk is associated with your loan. 

This is known as the Household Expenditure Method, or HEM for short, which splits your monthly expenses into three categories of essential, discretionary and luxury groups, and determines how much money you have to spare with your income factored in. 

There are a huge number of ingredients in this risk-assessing recipe, but they’re all designed to do the same thing: paint a clear picture for the lender of just how likely you are to meet their terms while paying back the money - and interest - on the loan amount. 

For example, two applicants of the same age, employment status and yearly income may be offered two different borrowing capacities if one applicant has displayed an ability to borrow money and pay it back to the lender on time, while the other has not.  

How Can I Check my Credit Score Before Applying for a Car Loan? 

It’s quick, easy and completely free to check your credit score before determining your borrowing capacity and subsequently applying for a car loan. While a number charge a fee for checking credit scores, the Office of the Australian Information Commission has ruled that Australians are entitled to a free consumer credit report every three months. 

The major Australian credit bureaus offering free credit reports include Wisr, Experian, Equifax and illion. 

How Much Can I Borrow for a Car Loan? 

As we’ve discovered, there are a huge number of things that influence your borrowing capacity, as well as the terms, interest rates and duration of any given car loan. As a result, it’s impossible to say exactly how much you can borrow for the purpose of a car loan. 

The easiest way to determine how much you can borrow for a car loan is to use the borrowing power calculator tools provided by all major lenders. These borrowing calculators are an easy, accessible way of checking your borrowing capacity, as well as getting a clear picture of how your repayments will look over the course of the loan, with interest figures included, too. 

Remember, it’s important to compare these figures from multiple lenders in your research phase, or enlist the help of a mortgage broker. 

How Much Can vs How Much Should I Borrow For a Car Loan?

It’s important to remember that no car, no matter the manufacturer, luxurious features or speed is worth making an irresponsible financial decision that can have a huge impact on your financial position and quality of life over the period of a loan. 

That’s why it is essential that you find a healthy balance between how much money you can borrow, versus how much money you should be borrowing for the purpose of a car loan. Just because a lender is willing to give you a certain amount of money doesn’t mean you should take it. 

Do your research, think about how your long-term financial, employment and even family position could change, and whether or not you would be able to afford the repayments in the event of a sudden change. 

How to Improve Your Credit Score

If you’re looking to increase your borrowing capacity for a car loan, one of the best ways to prove to a lender that you’re a financially-responsible applicant is to increase your credit score. 

Some of the simplest ways to improve your credit score include: 

  • Paying off any existing debt

  • Lowering your credit limit 

  • Paying bills before due date

  • Reduce your credit applications 

  • Avoid applying for new credit cards 

  • Paying credit cards and loan fees on time 

  • Keep credit accounts open; even if you’re not using them 

  • Avoid frequently changing employment 

  • Contacting a financial expert for guidance 

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