The process of applying for a car loan can at times be tedious and confusing. If it’s your first time, you’re probably learning how everything works. While there are no shortage of resources out there designed to shed some insight – and we’re certainly proud to be one of them! – not all of your queries will be easily addressed.
One of the more common topics we get asked about is car loan serviceability, with many borrowers unfamiliar with the term and what it entails. Here we’ll go into the matter so you can start your finance application with the knowledge you need.
What is car loan serviceability?
Although serviceability refers to all forms of finance, when used in the context of car loans, it is a measure of a borrower’s ability to make repayments on the vehicle. There are two predominant variables which drive this indicator.
First, income is the central lever that enables one to be in a position to afford the car in the first place. Other than your salary, this may include investment or rental income, commission, bonuses and potentially government subsidies as well. Forms of income that are considered to be stable are looked upon more favourably than those which may vary.
The second variable is your expenses, which, to some extent may be managed more carefully than your income. Expenses cover everything you would normally and routinely encounter while supporting your day-to-day living costs, as well as those for any dependents whom you may be responsible for. It also includes payments towards any other debt you currently owe.
How is this information used?
With the above information at hand, lenders will assess your ability to service debt by establishing what sort of car loan would be feasible for your personal circumstances. That is, the level of income you have remaining at the end of each month, after accounting for all expenses and other debt.
Once an assessment has been made the lender will have established a debt service ratio. This is a measure of how much your monthly debt expenses are in proportion to your income.
From a lender’s perspective, they will want to gauge how likely you are to make repayments on time, as well as ultimately repay the loan in entirety. The debt service ratio will help them decide this, with many financiers reluctant to lend to anyone with a ratio in excess of 30 to 35%.
If you are a borrower and you find yourself creeping beyond this debt service ratio, you may want to wait until your financial circumstances improve before applying for finance. Alternatively, some lenders may still be willing to lend you money, but they could impose a higher interest rate or more onerous terms. You will need to weigh up the risks, which is best done in consultation with professional experts.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.