Borrowing capacity for a car loan, our advice
Before granting a car loan, a financial institution will determine if you are able to repay it on a regular basis. There are different ways to check if you are eligible for a car loan.
The granting of a car loan for the acquisition of a new vehicle is not unconditional, and the lending institution must verify that your borrower profile is quite reassuring, and especially that you have defined a project in accordance with your income. It is important to prepare your project well, but especially to compare loan offers.
Determine borrowing capacity
As with any credit, you should set the limit from which you will not be able to repay a loan without compromising your quality of life.
In general, institutions set a debt ratio around 33%, which means you have to earn about three times the amount of your monthly payments.
To calculate your debt ratio, we must take into account different elements:
- your salary and that of your co-borrower if you have one (or non-salaried income for the self-employed);
- your other income (alimony, retirement, rents …);
- amount of current recurring expenses;
- Amount of monthly payments of other credits in progress, if you have any.
The calculation of the debt ratio is as follows:
(Monthly charges) x 100 / (monthly income)
For example, if you earn 2000 USD per month and you already pay a mortgage in monthly installments of 600 USD, your debt ratio is 30%, you have a good chance of getting a car loan, provided you determine the maximum amount you can borrow.
In this case, it is possible to add 100 USD of monthly payments. In any case, the good solution is to use the comparator to benefit from the best possible rates for a car loan.
The case of the repurchase of credit
If you are already repaying a credit that carries your debt ratio to the maximum tolerated by financial institutions, you can opt for the option of credit redemption, possible even if your current loan is a home loan.
The credit redemption is to consolidate all your loans into one, to pay only one monthly payment each month. By extending the duration of your loan, you lower your monthly payments and therefore your debt ratio.
For example, you pay an apartment at 115,000 USD in monthly installments of 600 USD for 4 years, but want to contract a car loan up to 10,000 USD.
- Loan 1: 95,000 USD of outstanding capital (192 months)
- Loan 2: 10,000 USD (60 months)
Without the repurchase of credit, the debt ratio would reach almost 40%. With the merger, by smoothing the two loans with a repayment period of 200 months, the debt ratio increases to 26%.
The disadvantage is to accept that the duration of the loan is extended, and therefore the total amount of credit is higher. It is also necessary to pay fees and other amounts specific to each financial institution.
What is the good borrower profile?
Before you make a loan, the banks or lending institutions will carefully study your file. If you need to take out a loan, check some points in your overall situation.
Your professional situation
Banks are cautious. The only profile that reassures them completely is an employee or executive on a permanent contract with a minimum of one year of seniority in his company.
You are also more likely to get a loan if you are self-employed or freelancer with a fixed income each month. The bank will also check your last tax sheet to determine your repayment capabilities.
Your financial behavior
If you finish every month with a little overdraft and can not put money aside, there is little chance that a bank will give you credit.
Financial institutions are reassured when they see savings, even minimal, set aside every month.
The longer you do it, the more likely you are to be taken seriously. You will be asked at least your last three bank statements, it is better to have an irreproachable behavior in this period of time.
Your personal contribution
Personal contribution is of paramount importance, not only because it reduces the total amount borrowed, but also because it proves to the bank your ability to save.
As part of a car loan, the personal contribution is not mandatory, but it remains a real plus in your file.
A reasonable purchase
If your debt ratio is already at the limit of what is tolerated and you want to take out a car loan to buy the new sedan all options, chances are you are denied credit or you are asked to review your desires down.
Consider making a reasonable request, within the limit of your borrowing capacity, that you have calculated in advance.