Determining how much you can borrow for a car loan is based on how much you earn, how much you spend each month, and your credit habits. This calculation is used to figure out your borrowing power – how much you can afford to pay back to a lender each month or repayment period.
How do I figure out my borrowing power?
According to the Australian Bureau of Statistics, by the end of 2018 Australians had financed vehicles to the tune of $1.23 billion. ASIC MoneySmart says the average car cost in Australia is $27,994 with the average loan amount totalling $18,049.
Your borrowing power is determined by looking at your income and expenses and seeing what is left over to service (pay back) a loan.
Let’s take this as an example: If you earn $100,000 a year and spend about 60% on essentials like rent/mortgage, bills, groceries, etc. this means you have $40,000 in disposable income. You may use about 20% of that on disposable purchases like nights out, movies, sports days, holidays, etc. This leaves you with $20,000 left over.
$20,000 in disposable income could demonstrate you can comfortably pay back a $50,000 loan over five years without running into any financial difficulty (provided you don’t lose your job, fall ill, etc.)
Using this example, if you take out a five-year loan for $50,000 with a $4,000 deposit, your borrowing power ranges between $868-$1,047 per month. Owing more each month might put you in financial trouble, which a lender is bound by law not to do.
A lender will not simply lend out $300,000 for a luxury vehicle to someone who earns $50,000 a year, even if their credit is spotless – this would put the borrower at risk.
What is creditworthiness? Is it tied to my credit score?
Yes – creditworthiness is expressed as a credit score by the major credit reporting agencies. ASIC MoneySmart says a credit score is “a number based on an analysis of your credit file, at a particular point in time, that helps a lender determine your creditworthiness.”
Your credit score is an aggregate or expression of how risky you might be as a borrower. Your credit history will list which lenders you owe money to and how much, how much credit you have borrowed, how many times you’ve applied for credit, unpaid debts or maxed out credit, and any court orders or agreements related to unpaid debts or bankruptcy.
Most credit agencies, the bodies that prepare your credit reports, give you a score between 1200 and 0. (Some provide a number between 1000 and 0.) If you have a high score, you are deemed more “credit worthy.” If you have a low score, you are more of a risk and may be in the “bad credit” or “below average” category. For example, applying for credit in many places and being rejected shows lenders you may be desperate for credit and could have trouble paying them back. This all drops your credit score.
This can hinder your attempts for credit approval and may mean you have to prove your creditworthiness in other ways. Even so, lenders may only give you a loan with a higher interest rate as this is “insurance” against not being paid back (known as defaulting.)
Calculate your car loan repayments
|Lender||Product Name||Advertised Rate||Comparison Rate||Monthly Repayment|
|Savvy||New Car Loan||2.85%|
|Bank of Australia||Used Car Loan||6.45%|
|ANZ||Online Secured Car Loan||7.85%|
|CUA||Fixed Rate Car Loan||7.99%|
|BankSA||Secured Fixed Personal Loan||8.49%|
|St George||Secured Fixed Personal Loan||8.49%|
|CBA||Secured Car Loan||8.49%|
|NAB||Variable Rate Personal Loan||14.19%|