Are you ready to buy a car? Can you afford the latest Toyota model released 2 years ago? Determine your buying power to find out if you can afford a car loan. Your borrowing power will dictate the amount a loaning company can lend you and how much you can afford to pay.
How important is determining your buying power?
A full understanding of your borrowing power can save you time. This also limits the number of loans you apply for. When you know the loans that you can afford, it narrows down your option of lenders and helps you find the best rate in line with your creditworthiness.
Note that once a lending company checks on your credit score, it will be added to your credit report even if you decide not to pursue with the loan. Multiple inquiries on your credit report create a negative impact on your borrowing power. You can be tagged as high risk by lenders. This makes it harder for your loan to be approved in the future.
Also, when you are able to determine your borrowing capacity, you know which car models should you consider and skip. This cuts down the time on selection and approval process.
To help you determine your buying power, use the borrowing power calculator. Below is a guide on how to use the calculator to compute your buying power.
How to use the Borrowing Power Calculator
1. Enter your income details.
Joint income: Choose yes if it is a joint income with your spouse.
Dependent children: Choose from 0 to 3+ on how many dependent children you have. Net salary: Type in your net salary
Net salary 2: Type in your spouse’s net salary.
Other net income: If you have other sources of income, add your estimated net income
2. Enter your expense details.
Annual expense: automatically filled out when you choose from 0 to 3+ on dependent children
Car loan repayment: if you have an existing car loan repayment
Other payments: this is a total of all your monthly expenses, you can account for it separately to get your totals.
Total credit limits: What’s your credit card limit?
3. Enter your loan details
Interest rate: annual interest rate
Loan term: how many years are you paying for the loan
4. View your results:
You can see your results below this section as follows: how much you can borrow, monthly repayment, fortnightly repayment, and weekly repayment.
How loaning companies figure out your buying power?
Loan companies consider carefully your month to month living costs and compare them against your regular monthly earnings to determine whether or not you could afford loan obligations. However, the determining factor becomes more complex when the following are involved:
- Multiple income streams
- Loan and credit card debts
- Dependents or people who are fiscally relying on youDebt-to-income ratio
One more important consideration is the debt-to-income ratio. A general rule of thumb when determining your borrowing potential is that the debt you pay each month must not take more than 40% of your regular monthly earnings. For anything that goes higher raises a red flag to lenders.
Note: Financial specialists recommend that debts being paid each month should not take more than 20% of your net pay (earnings after expenses) should be used for car expenses.
Computing for your monthly expenses
Before even applying for a loan, a computation of your monthly expenses should be taken into account. Come up with a detailed month to month expenses to determine your spending budget. A detailed breakdown helps you decide if you are still able to include one more expense.
The following should be taken into account when creating a detailed monthly expenditure income:
- Basic expenses (essentials) – These include housing (rent or mortgages), bills and utilities, commuting expenses, and food and grocery essentials. Include other monthly necessities that you or your family can live without.
- Car maintenance and necessities. Consider car registration, licensing, insurance policy, fuel, repair expenses and others. Keep some financial leeway for others.
- Financial obligations. Loan payments and credit card bills
- Extra expenses – These are other expenses when dining out, shopping for clothes, travel out of town, and others of the kind.
Note that an ideal loan should not make any considerable changes in lifestyle. Should you be stretching your financial allowance, a loan is probably not the right monetary move.
Determining your buying power is one of the most important factors when taking out a car loan. Consider all your expenses, fees, taxes, dependents, and other necessities. Compare it to your monthly income to get the debt to income ratio. When you know what the bank expects from you and where you are at with your capacity to pay, you can make smart decisions when it comes to car loans.