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Determining how much you can borrow for a car loan is based on how much you earn, how much you spend each month, and your credit habits. This calculation is used to figure out your borrowing power – how much you can afford to pay back to a lender each month or repayment period.
How do I figure out my borrowing power?
According to the lending indicators from December 2023 by the Australian Bureau of Statistics (ABS), the value of new fixed term loans taken out to purchase a vehicle was over $15.6 billion across 2023, at an average of around $1.3 billion per month. Additionally, data released by Australian lender Plenti states that the average loan size is $31,738.40.
Your borrowing power is determined by looking at your income and expenses and seeing what is left over to service (pay back) a loan.
Let’s take this as an example: if you earn $100,000 a year and spend about 60% on essentials like rent/mortgage, bills and groceries, this means you have $40,000 in disposable income. You may use about 20% of that on disposable purchases like nights out, movies, sports days and holidays. This leaves you with $32,000 left over.
$32,000 in disposable income could demonstrate you can comfortably pay back a $50,000 car loan over five years without running into any financial difficulty (provided you don’t lose your job, fall ill, or have another family emergency).
Using this example, if you take out a five-year loan for $50,000 with a $4,000 deposit, your borrowing power may range from $868 to $1,047 per month. Owing more each month might put you in financial trouble and lenders are less likely to approve applications if they believe you may struggle with your repayments.
A lender won't simply lend out $300,000 for a luxury vehicle to someone who earns $50,000 a year, even if their credit is spotless – this would put the borrower at risk.
What is creditworthiness? Is it tied to my credit score?
Creditworthiness is measured with a credit score by the major credit reporting agencies. ASIC MoneySmart says a credit score is “based on personal and financial information about you that's kept in your credit report”. It'll list the following information:
- Which lenders you owe money to and how much
- How much you've borrowed
- How many times you’ve applied for credit
- Unpaid debts or maxed out credit
- Whether you make your payments on time
- Any court orders or agreements related to unpaid debts or bankruptcy
Credit agencies, the bodies that prepare your credit reports, give you a score between 0 and 1,000 or 1,200. The following table breaks down how scores are categorised by the three major credit reporting agencies in Australia:
Note: This table uses Equifax's category names. Different credit reporting agencies have different names for some of these categories.
If you have a high score, you may be deemed more “credit-worthy.” If you have a low score, you are more of a risk and may be in the “bad credit” or “below average” category. For example, applying for credit in many places and being rejected shows lenders you may be desperate for credit and could have trouble paying them back. This all drops your credit score.
This can hinder your attempts for credit approval and may mean you have to prove your creditworthiness in other ways. Even so, lenders may only give you a loan with a higher interest rate, as this is “insurance” against not being paid back (known as defaulting).
How does a lender figure out my borrowing power?
A lender will conduct a soft credit check, which doesn't go on your credit file, to assess whether you're eligible for a car loan. This is part of responsible lending practices which are in place to protect consumers.
Using this publicly available information, a lender can determine whether you are a risky borrower or not. Some lenders may offer you a preliminary interest rate so you can do your first set of repayment calculations. It's a check to verify you are who you say you are. This is also known as loan “pre-approval” or “approval in principal”.
Before making a “hard” or formal credit inquiry with a credit reporting agency, you may supply payslips, employment statements, bills in your name that you have paid, and other financial statements to show you can afford to pay back a loan. These will often also form part of your pre-approval and paint a clearer picture to your lender of what you can manage.
The formal credit inquiry confirms the lenders’ assessment of a borrowers’ creditworthiness. This will only be done during a formal application process and will be recorded on your credit file.
Looking at repayments over interest rates
Low interest rates aren’t the be all and end all of saving money on a car loan. A lender can advertise the lowest interest rates, but it doesn’t mean you’ll be paying less over time in repayments. Some interest rates may be low but when expressed as a comparison rate, which includes the main fees in the percentage, the costs can be much higher.
Looking at your repayments instead of looking at interest rates will give you a clearer picture of how much the loan costs each month and how much you'll be able to budget for. This is a fixed cost and can be factored into how much you can afford to borrow once registration, insurance, fuel costs, and other on road costs are considered.
Using a car loan calculator can give you a general idea of how much you can expect to pay each period. All you need to know is the comparison rate you’re likely to pay and how much you want to borrow. The calculator can be useful in figuring out your own borrowing power.
What you’ll need to prepare for a car loan application
Check your credit history
Checking your credit history helps you understand your borrowing power before a lender makes any sort of judgment. If your credit history has mistakes or defaults that aren’t your fault, you can use this opportunity to correct them. It could save you plenty of money in interest.
A realistic budget
There's little point in having no idea how much you can afford to borrow before you apply, even for pre-approval. Take the time to work out the loan amount and term that suits your situation before you get the wheels in motion on your application.
Payslips and employment information
Having payslips to confirm your income is always a plus when you apply for a car loan. This proves your creditworthiness in an additional way apart from just checking your credit score.
Financial statements
If you have supplementary income or can prove you are responsible with savings, this can further aid your car loan application. If you have more disposable income than what your initial assessment shows, it could improve what interest rates are available and/or your borrowing power.
Paid bills or proof of residency
Showing lenders you are responsible with bills and residency (e.g. not moving often) can also tip the scales in your favour, as these point to a more stable situation and more stable finances as a result.
Car loan affordability questions answered
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Bill TsouvalasFact checked
This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
