It’s time to buy a new set of wheels. But before you can start taking different models for a

test drive, you need to know what your maximum budget is. And because a car is an

expensive purchase, that typically means figuring out how much a lender will be prepared to

loan you.

So what’s the answer to the question: how much can I borrow for a car loan?

Well, as always, it depends on your individual financial situation. That’s because lenders

look at several factors such as your income, savings, expenses, debts and credit history

when they calculate how much you could borrow for a car loan without it causing financial

difficulties.

This is known as your borrowing power. The more borrowing power you have, the more

money a lender may be willing to loan you.

How do you calculate borrowing power?

Before you apply for car finance, it’s a good idea to have an understanding of your borrowing

power.

That’s because rejections can damage your credit score, which would make it harder to get

approved for credit in the future. Knowing your borrowing power in advance can help prevent

this, as you can then limit your applications to car loans for which you are likely to be

approved, increasing your chances of approval.

So how do you calculate borrowing power?

Unfortunately, there isn’t one set way. That’s because each lender uses its own different

internal method to assess your financial position and, subsequently, your borrowing power.

As a result, your borrowing power differs from one lender to another. That said, lenders are

essentially weighing up your monthly income against your living costs, and then adding a

buffer (in case interest rates rise or your financial circumstances decline), to see if you can

afford the car loan repayments.

A car loan calculator can help you estimate your car loan repayments, based on the rate,

term and amount you’d like to borrow.

But while a borrowing power calculator can give you a good idea of what you can afford to

borrow, keep in mind that this is just a rough estimate. An expert car finance broker like

Naked Loans can give you a more accurate picture of your borrowing power, as they know

the ins and outs of many different lenders’ policies.

How to work out living expenses

Your living expenses play a big role when a lender assesses if you can afford to service a

car loan. That’s why you’ll typically be asked to provide an estimate of these costs in your

car loan application, including how much you regularly spend on:

● Groceries

● Utilities and rates

● Phone bills, internet and streaming services

● Medical, health and fitness services

● Transport

● Recreation and entertainment

● Personal clothing and care

● Education

● Insurance

● Children and pets

● Other expenses

The lender may then compare these self-declared living expenses with the Household

Expenditure Measure (HEM).

HEM is a benchmark figure that estimates the average amount of money households spend

every year based on details such as income, location and family size. It’s regularly updated

based on Australian Bureau of Statistics data.

Naturally, if the lender does compare HEM with your declared expenses, it will typically take

the higher of these two figures when assessing whether you can afford the car loan.

Other factors impacting your borrowing power

While your salary and living expenses are likely the first things that come to mind when

working out how much you can borrow for a car loan, they aren’t the only factors in play.

You should also consider:

● Your credit score: The higher your credit score, the more creditworthy you appear

in the eyes of lenders. That makes it more likely you’ll be offered a lower interest rate

and more favourable terms – both factors that can increase the amount you can

borrow.

● The car loan’s interest rate: The lower the interest rate, the lower your monthly

repayments, so the more affordable the car loan.

● The loan’s term: A longer loan term can also mean your monthly repayments are

lower, boosting your borrowing power.

● The size of your deposit: The larger your deposit, the greater your borrowing power

as you will be a lower risk to the lender

● Balloon payments: A balloon payment is a lump sum due at the end of your car

loan term, which reduces the size of your regular monthly repayments (but results in

you paying more over the life of the loan).

● The cost of running and maintaining a car: Owning a car isn’t cheap, so don’t

forget to budget for costs such as registration, fuel, insurance, repairs and servicing.

Do I need a deposit for a car loan?

The good news is that you don’t necessarily need to have a deposit for a car loan. That said,

having a healthy deposit saved comes with many benefits such as:

● Increasing your chances of approval

● Being rewarded with a lower interest rate

● Boosting your borrowing power

● Reducing the size of your repayments

Not all lenders require a deposit on a car loan, so don’t panic if you don’t have any savings.

An expert finance broker like Naked Loans, which has relationships with a large and diverse

number of lenders, can still help you find a competitively priced car loan that suits your

needs and circumstances.

How can I increase my borrowing power?

You might be wondering: ‘How can I increase my borrowing power?’

Fortunately, there are several ways you can give your borrowing power a boost such as:

● Saving for a larger deposit

● Opting for a car loan with a longer term

● Paying down your debts

● Cutting back on unnecessary day-to-day spending

● Regularly reviewing your credit history (to make sure no mistakes are dragging down

your credit score)

Looking for an affordable car loan?

If you’re thinking about applying for car finance, it usually pays to work with an expert finance

broker like Naked Loans. That’s because we can shop around on your behalf, finding you

the best deal that suits your particular needs and financial situation. This doesn’t just save

you time, money and stress –it also protects your credit score.

Speaking of which, at Naked Loans, we encourage everyone to apply with our ‘all

applications considered’ policy. So, even if you have bad credit, we can give you a second

chance.

Apply online now or contact us by calling 1800 438 625, emailing

info@nakedloans.com.au or filling in this online form.