When looking for a car the first question people ask is usually: I want a car loan – how much can I borrow? Often people have no idea how much they can borrow and are nervous about being told that they can’t afford to borrow as much as they want. So the best thing to do is to use a calculator that you can play with, put in your income and expenses and get a rough idea of what’s possible.
There are 2 parts to getting any loan:
- The cost of setting up the loan. This includes any application fees or other upfront charges; and
- The cost of the repayments. This includes the interest charges, any part of the actual loan that you are paying back, and any agreed monthly account charges, etc. The calculator, below, will work out this part for you. Just remember that, depending on the loan, there may be some upfront charges associated with buying the car and getting the loan. I’ll go through these in another post.
When you apply for a loan the lender will use your specific details to work out how much they will lend you, but to get a rough idea of how much you might be able to borrow I have attached the Borrowing Power Calculator below.
Now before you jump into using the calculator there are a few things you need to know when putting your details into it that will help you get a more accurate result.
Using The Borrowing Power Calculator
Net Salary: This is your pay after tax has been taken out and I suggest using your base pay, so without overtime and allowances, (if you get them) as each lender assesses them differently. Some lenders will include 50% of them, others 80%, with some it depends on whether you are an emergency worker or can prove that it is a mandatory part of your work, etc. So start off not including them and if you can borrow enough to buy the car you want, then the overtime and allowances will just make affording the repayments easier.
Dependents: How many children do you have?
Other net income: If you have an investment property that you receive rent on, this is where you can include the income from it, but most lenders will only include 80% of rental income so reduce it by 20% before putting it into the calculator.
If you receive Family Tax Benefit for children, most lenders will only include it for children up to 11 years old so only input that part of it.
Annual Expense: All lenders have an estimate of the cost of living for singles, couples and children and they will use their numbers for their calculations even if you actually spend much less on your living costs such as food, transport, utility bills, clothing, etc. So leave the tick in the ‘Use default from assumptions’ box and the calculator will use approximate figures that the lenders use. This is another area where the numbers used by different lenders can vary quite a bit but this figure will do for initial calculations.
Monthly Car Loan Repayment: Use this if you already have a car loan and are looking for another one, otherwise just change it to zero.
Other payments: If you have other expenses such as daycare, private school fees, maintenance, etc put them in here.
Enter your loan details: This is about the loan you want to get for the new car. I suggest putting in an interest rate of 10% because you want to be sure you can afford a higher rate, and then any lower rate you get from a lender is easier for you to afford.
Loan Term: Most car loans are up to 5 years so put in 5 unless you want to pay it off more quickly.
So now go ahead and enter your details into the Borrowing Power Calculator so we can look at the results:
View your results: This is the exciting bit! So now that you’ve put in all your income and expenses the calculator will tell you how much you can borrow. Remember that this is only a guide and the actual amount that each lender will lend to you will vary because each of them assesses each type of income and expense slightly differently. If the amount you can borrow is close to the amount you want to borrow then some shopping around for the loan may be needed to find the lender that assesses your income and expenses in a way that works best for you. This is particularly the case if you are working part time, have more than one job, do a lot of overtime, etc. You now have a good idea of how much you can borrow and are ready to think about what type of car you want or need (unless you already have a particular car in mind!)
If you’re ready to move forward and find the best loan for you, visit my Enquiry Form and send me details of what you want. Let’s see what the actual interest rate is if we shop around!
Of course if you have any questions or comments about the Borrowing Power Calculator or borrowing for a car loan, just comment below and I’ll get straight back to you!