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How much money can I borrow for a car loan?

Jodie Humphries avatar
Jodie Humphries
- 5 min read
How much money can I borrow for a car loan?

If you’re planning to buy a car using finance, taking different models for a test drive can be exciting. However, before you do, you need to consider how much you can spend. It’s important to evaluate how much you can borrow and afford to repay in monthly instalments. 

Disclaimer

This article is over two years old, last updated on June 3, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent car loans articles.

Why is it important to know how much can you can borrow for a car loan?

If you’re in the market for a new car and need vehicle finance to get your new set of wheels, you’ll need to know how much you can afford to borrow; aka your ‘borrowing power’. 

Knowing your borrowing power lets you shop for a vehicle with confidence and may help you to stay on budget. It also increases the chances that you’ll apply for loans that you’re able to afford and therefore more likely to be approved for. 

While comparing multiple options is good, applying with several lenders is not always the best step, as multiple credit checks or rejections can impact your credit score. When you apply for a car loan, it’ll show on your credit report and it will also indicate if your application was approved or not. If your credit report shows multiple enquiries at once or credit product rejections, it can be a cause of concern for lenders and you may have difficulties getting car loan approval. 

It’s also worth checking the eligibility criteria for a car loan to reduce your chances of rejection. The car loan eligibility criteria may vary from one lender to another, but standard requirements will apply, including:

  • Being an Australian resident or holding permanent residency
  • Being at least 18 years of age
  • Meeting the lenders minimum income requirements
  • Providing details of assets and liabilities
  • Having a good to excellent credit score
  • Providing information about the vehicle and any insurance (particularly important for a secured car loan)

How do lenders determine your borrowing power?

When you apply for a car loan the lender will require a few key documents in the application, including proof of income, bank statements and details of existing debts. The lender will assess your income and expenses through these documents to determine your borrowing power. This is how much you can afford to repay on a car loan without being at risk of default. 

If you’ve applied for a 3-year, $20,000 car loan and the monthly repayments are expected to be around, say, $600, the lender is taking stock of your monthly earnings and expenses and assessing your ability to meet this $600 monthly repayment. 

Some lenders use what’s called the Household Expenditure Measure (HEM) to estimate your borrowing power. It divides your household expenses into three categories: essential expenses like food and utilities, discretionary spending, such as childcare, dining, and entertainment, and luxury, such as holidays. Your HEM is compared to median spending on essential items by Australian homes and the bottom quartile of discretionary spending. 

The HEM is also adjusted based on your location, if you’re a single parent or partner household and the number of children you have. The lenders will want to know your monthly expenditure and compare it with the HEM. To estimate your borrowing power, lenders consider the higher of HEM or actual monthly expenditure.

How much will I be approved for?

The car loan amount you may be approved for depends on your requirements and financial situation. As mentioned above, when you apply for a loan, the lender will check your financial position and cash flow to estimate the amount you can comfortably pay towards the ongoing instalments of the car loan. 

If you’re curious as to how much you may be approved for before you submit your application, it may be worth using a car loan Borrowing Power Calculator.

You can use a Borrowing Power calculator by providing some basic details to estimate the amount a lender may offer you. The Borrowing Power Calculator will also help you to estimate the approximate amount of interest you may repay over the life of the loan. 

The results depend on a number of factors, such as the amount you want to repay each installment, loan, and interest rate. This is one way would-be borrowers can estimate how much they may be approved for with a car loan based on their income and expenses.

Don’t forget the additional costs of car ownership

There are some extra costs of car ownership you should take into account. Additional car ownership costs include:

  • Car registration
  • Stamp duty
  • Compulsory third party (CTP) insurance
  • Other insurances, such as comprehensive car insurance.
  • Petrol costs
  • Road tolls
  • Regular services, maintenance or repairs
  • Car loan fees, such as application fees, annual fees or late payment fees.

Is creditworthiness important to determine how much I can borrow as a car loan?

When you apply for a car loan the lender will assess your creditworthiness, as determined by your credit history and credit score. A higher credit score makes you more creditworthy and improves the chances of approval of your car loan. A lower score can hinder the approval process, and if approved, you may pay a higher rate of interest on the car loan.

Your credit history and credit score is a reflection of your financial responsibility and a poor credit history and credit score may mean you’ve had adverse events in your past, such as bankruptcy or defaulting on a loan. Whereas a good to excellent credit score may mean you’re likely to meet repayments and at less risk to default on the loan.

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Product database updated 16 Jun, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.