When you start to consider a loan for your next car, you’ll quickly realise that your borrowing power will dictate how much credit a financier is prepared to afford you. This may ultimately fall within your expectations, but it is best practice to gauge your position sooner rather than later. How should you do this? Start by examining each aspect that impacts your borrowing power.
From a financier’s perspective, there is a reduced level of risk lending to someone in a steady job with a consistent salary coming in. While being self employed does have its perks, there are far more hoops to jump through to prove the stability of your earnings, however certain occupations have less seasonality or variance than others. On top of this, your employment history may also shed light as to how long you generally remain in the same job.
Perhaps the most important piece of the puzzle, your credit history will speak to your reliability to repay a loan. On your credit report will be other lines of financing, as well as your repayment history. Evidence that you have repaid prior loans will put you in good stead to increase your borrowing power.
Your credit history will include both positive and negative data, culminating in a credit score that will either increase or decrease your prospects of being able to borrow money. If you have defaulted on a loan previously, or been declared bankrupt, you may need to approach specialist lenders, as your borrowing capacity will be constrained.
If you are in a position to put forward a deposit towards your next vehicle – sometimes called a down payment – you can significantly increase your borrowing power. The deposit not only serves as a sign that you are prudent in your ability to generate sufficient cash, but it will help reduce the loan-to-value (LTV) ratio, thus minimising the financier’s risk. From your point of view, you will also reduce your exposure to interest costs and make it more manageable to repay the loan over an equivalent timeframe.
By examining your living expenses, a financier will be able to determine your debt service ratio. This is a measure of how much your monthly debt expenses are in proportion to your income. As you can imagine, your day-to-day expenses will diminish the level of income you are left with at the end of each month. From rent, to utilities, groceries, your credit card and any other expenses you incur, the lower these are the greater your borrowing power is likely to be.
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.