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How much can I borrow with a car loan?
December 17, 2020● 4 minute read●
Cars can cost a lot, and it’s nice to know just how much you can borrow before dreaming above your means. The amount you can borrow will depend on both you and your lender. They’re some criteria to consider before the lender decides just how much can be loaned. It’s important to know your borrowing power, and they’re a number of factors that determine that.
Your financial situation will determine just how much you can afford to repay monthly. This will in turn decide the amount you’ll be loaned. Before applying for a loan, it is important for you to have an understanding of your financial grounds. This will help you set up realistic loan goals. It also helps to know all these so you won’t seem lost while the lender asks you some questions you’re expected to know. Here are the things the lender will look into to get an overview of your financial situation.
You’ll be asked to deposit an initial amount at the start of the process. This amount will determine how much will be left to spread over the loan term. The amount you have saved up for deposit will determine the amount the lender can borrow you. It can also determine your interest rates to an extent. The lender will also request a bank statement to check your savings history. All this is to ensure that you’re able to afford the loan you want.
Lenders like to check through your credit profile to know your history with other lenders. Your history will show if you’ve defaulted loan repayments in the past and how you’ve dealt with previous funds. A low credit score can hurt your chances, but shouldn’t be much of a problem if it’s a secured loan. A good credit score on the other hand can influence the lender to give you a higher amount wish a good rate.
Income and liabilities
Lenders will take not of your type of job and salary. People on a steady monthly salary tend to have an upper-hand. Your income level will be observed to see how much you earn, to be sure you can afford the loan. This also helps determine your monthly repayments and loan term. Your lender will also check for any existing loans or debt.
Car type and model
The type of car you want is a great determinant of how much you can borrow. If you want a Ferrari, you’ll get a loan that covers a Ferrari if your income level can afford it. The same thing goes with other types of cars. Cars come at different prices and the lender will want to factor this in before loaning you money. You have to factor in not just the purchase price but also the running cost. Since you’re not exactly buying the car to have it stored in your garage.
You must also be realistic, working with budgets while picking a car. You do not want to have issues repaying your loan and risking car repossession if you end up with a car above your means. You’re also likely yo be turned down if the car you pick is above your budget, which will impact your credit score. The lender will borrow you money based on the value of the car. Some lenders will lend 100% of the value while others can add extra for running costs.
Are there borrowing limits for car loans?
Some providers have a limit on how much you can borrow for a car loan while others don’t The major factor that will determine your borrowing limit is your income level. Most lenders don’t have any trouble financing as much as you want, so far your financial records show that you can afford it. There’s no stone written rule to how much you can borrow as lenders have varying terms and conditions.
You alone fully understand your financial situation and should probably set the borrowing limit for yourself. Car loans can be really beneficial if managed properly. However, taking a huge loan with no means for it can do way more harm than good. Always ensure that your goals are idealistic.
Here are three car financing rules that can set you on the right path;
Put down at least 20% of the car payment
A car starts depreciating from the moment you take the wheels and drive it out of the dealer’s lot. It’s always better to have a substantial down payment. This saves you from paying more than the car’s value over time. Having more money saved up for down payment also reduces the amount you have to spread over your loan term.
Your loan term should not be more than four years
A longer loan term gives you lower monthly repayments but you also end up paying more interest over time. Because cars tend to lose value over time, they’ll have lost most of its value after four years and you won’t want to keep paying it off. Finance experts advice four years loan term for cars but it’ll be even better if you can shrink it to three years. Also note that there’s no pressure at all and if you need to stretch your loan payment, try not to go above 5 years.
Your total car payment should not exceed 10% of your gross income.
This is not a one size fits all rule but it’s financially advisable to not spend more than 10% of your income on loan repayments This will grant you room for other responsibilities like housing, feeding, vacation or emergency fund. Do not put all your eggs in one basket as you can’t possibly live on your car alone.
This also ensures that an unforeseen financial event like a salary cut, economic depression or job loss won’t affect you much.
They’re a lot of factors in play to determine the amount of money you can borrow for a car. Be sure to put your financial house in order before seeking a loan.
Written by Jacaranda Team