Understanding car loan serviceability

Getting approved for finance is a big deal, and for some people, the thought of not being approved puts them off from ever seeking finance in the first place.

One of the key factors in determining whether or not you will be approved is whether you can afford to service the loan, and this is where the confusion starts for many people.

Let’s say your new car is going to cost you $199 per week, now let’s say at the end of each week, after you’ve paid your rent, bought all your food and put some money aside for bills and have $200 sitting in your bank account.

You can ‘afford’ the $199 per week and still keep $1 in your pocket, but if this was a real situation, you probably wouldn’t be approved for the loan because $1 per week just isn't enough for someone to live off.

You might be able to make your payment in the first week, but by week two, you might find that you can't afford to make your repayment because of an unexpected event or expense.

Car loan lenders use a set of standard living expense

Car loan lenders use a set of standard living expenses for all applicants, not only does this speed up your car loan approval process, but it also prevents people from telling fibs to get into a car they wouldn’t be able to afford in the long run.

Most financiers use a set of standard living expenses based off the Henderson Poverty Index (“HPI”). The amount of these expenses is normally determined by your marital status, and number of dependents, and is then subtracted from your after tax income.

Each financier has their own rules about what is and isn’t income for the purposes of a loan assessment.

Once all your expenses are subtracted from your total income this should leave you with a surplus. This surplus must be larger than the monthly payment amount for your car loan; otherwise you will not fit the lender’s affordability guidelines, and you won’t be approved.

Some lenders are happy provided you have at least $5 in surplus after taking on the car loan, others could require a larger surplus and this is where an experienced car finance broker can really help.

Different lenders can have different income criteria

While expenses are the first thing that come to mind when discussing affordability most people find that their financiers interpretation of income can be slightly different to their own.

Each financier has their own rules about what is and isn’t income for the purposes of a loan assessment. A common example of this is how family tax benefit income is treated.

Some financiers may only allow a portion of Family Tax Benefit payments to be included as income with your assessment. This could be the same for other forms of income such as government pensions, superannuation drawdowns, and rental income from investment properties or regular dividends from shares.

Incomes such as Newstart Allowance or Youth Allowance are in most cases not acceptable forms of income by most lenders.

Be sure to have a clear idea of what car loan you can afford before applying

This is why it is very important for brokers to understand your full financial position prior to recommending any lender, as they want to make sure you fit the right lender based off your circumstances, whilst also making sure that they can get you the best deal from their panel of lenders.

There is no use quoting a loan product that you wouldn’t qualify for and capacity to repay is one of the biggest factors taken into consideration.