How Much Can You Borrow for a Car Loan?

Are you looking forward to buying a used or new car? Well, getting an auto loan is one of the best ways to finance your purchase. However, obtaining this car loan is not as straightforward as many would assume. There are several factors that you must consider. For one, you need to know more about your borrowing power, as this will help you determine how much you can afford to borrow. Let’s learn more below.

Top two major factors that determine how much car loan you can borrow

Generally, two major factors can help you decide how much car loan you can borrow. The two factors are your credit score and borrowing capacity. Read on to learn more:

Your borrowing power

Different individuals have varying borrowing capacities. This borrowing capacity is an essential factor when shopping for a car loan. As stated above, borrowing power or capacity determines your ability to afford a loan. Usually, a lender will assess your cash and financial flow to determine whether you can comfortably repay the loan.

To evaluate your borrowing power, start by analyzing your income and expenses. Then determine whether you can service a loan with what. For instance, if you earn $120,000 a year, spend 55% on all essentials, including taxes and other debt repayments. You will have about $54,000 of disposable income. If you use about 20% of this disposable income on other purchases like holidays, sports days, movies, and night outs, you will still have $30,000 left.

The $30,000 a year left shows that you can comfortably service a $70,000 car loan over 60 months without having any financial challenges. This calculation is only applicable if you have a stable source of income. The income and living expenses calculation will show how much money you will have left to service a car loan.

Your credit score

A credit score is vital in calculating your creditworthiness. Your credit score expresses how risky a loan will be to the lender. It is also a significant determinant of how much car loan you can get.

One thing to note is that your credit history is vital to your overall credit score. Credit history involves factors such as:

• Repayment history
• Total debt levels
• Number of opened accounts
• Number of borrowers
• Maxed out credit or unpaid debts
• Court orders regarding bankruptcy or unpaid debts

Financial institutions will use your credit score to analyze whether you can repay loans on time. You will qualify for a car loan with low-interest rates if you have a higher score. On the other hand, if you have a low or bad score, you may either fail to qualify for a loan or get one with extremely high-interest rates.

It means that a car loan for someone with a low or bad credit score is much more expensive than that of one with a high credit score. So do you have a low or high credit score? Can you afford to pay the high-interest rates for the auto loan if you have a low score? Knowing your credit score is crucial when determining your borrowing capacity.

Other factors to consider when determining how much car loan you can borrow

When establishing how much a car loan you can afford to borrow, try to be as realistic as possible. Make sure the monthly payments will not place you in a difficult financial position. So, apart from credit score and borrowing power, here are other factors that will guide you on how much car loan you can afford to borrow:

Your monthly budget

One thing to note is that beyond the monthly loan payment, there are other car-related expenses, like car maintenance, fuel, and insurance, that you need to consider. These other car-related expenses will impact the overall cost of car financing as they determine whether you will have money to pay for loan servicing. Therefore, make sure you factor in the car-related expenses that will impact your ability to make monthly car loan payments.

Your choice between a used or new car

The type of car you intend to buy is also crucial in determining how expensive or cheap a car loan will be. One thing to note is that not every car is financeable. Used cars with high mileage may have very high interest. They may also not be financeable as they pose a significant risk to the lender. It means that used cars have more expensive auto loans than new ones. Can you afford to make payments on a cheap or expensive loan?

Most lending institutions consider Loan To Value ratio (LTV); it involves loan size vs. vehicle value. This LTV caps the loan size. Therefore, if you want to buy a used car, use your income and expenses report to determine whether you can afford the high-interest rates.

How to make car loans more affordable?

There are ways through which you can make a car loan more affordable for you. Here are the top ways to enhance car loan affordability.

Make a car deposit

Making a car loan as affordable as possible is the way to go, especially if you cannot afford expensive loans. A deposit can make a car loan more affordable for you. Ultimately, it will lower the overall interest rates and the car repayment period. So how much car loan deposit can you afford to make? The more deposit you make, the cheaper your car loan will be.

Consider a short loan term

The more time you take to repay a car loan, the more expensive it will be. This high cost is because of the extra interest you will pay. Thus, considering a short loan term is one of the best ways to make a car loan more affordable. Make sure that the repayment plan you have suits you.

Boost your credit score

Your credit score plays a significant role in an auto loan rate. It impacts whether lenders can provide you with a lower rate or not. If you have a low credit score, boosting your overall score can make a significant difference in making the loan more affordable due to lower interest rates. Some of the best ways you can use to boost your history include:

• Making regular debt payments.
• Double-checking your credit report for errors.
• Positively building your credit history.

Use your present car as leverage

Your current car still holds value and can significantly reduce auto loan costs. If you trade it in, there is a high chance of getting a more affordable loan.

The most convenient way to make the most of your car sale is by selling it to a dealership. Car dealerships are continuously looking for new inventory to add to their showrooms and sell in the future. Selling your car to a dealership also has many benefits, such as an added tax advantage and safe and reliable transactions.

Bottom Line

How much car loan you can borrow depends significantly on your borrowing capacity. If you have a high borrowing capacity, you can easily buy your dream car as you can afford to make regular monthly payments. The best way to check your borrowing capacity involves evaluating your income and expenses.