How Much Car Loan Can I Get Approved For?
Frequently, a car is a person’s first major purchase. It’s exciting, especially with all the cool features you can get these days. Everybody knows that your car is like your clothes. It says something about who you are; so most of us aren’t inclined to grab the cheapest, most reliable thing on four wheels. But unlike clothes, most people have to borrow money to buy a car. So, before we start dreaming about what kind of car we want, we ought to explore the question: How much car loan can I get approved for?
First things first—you do not want to ask this question at the dealership. Dealers will not be concerned about how much you can actually afford; their goal is to sell you the most expensive car they can, because their commission rides on how much you spend. Though many of them will assure you they just like you so much, and want to help you get the best car, in fact they usually have very little interest in how this purchase will affect your life or ability to manage your finances in the future.
Instead, talk to a lender who is interested in how this purchase and loan will impact the rest of your life—because they want you to be able to pay them back. Credit unions generally have the lowest interest rates on auto loans, and because they are owned by their members, they’re very invested in making sure you don’t overextend on a loan.
So, yeah, the cherry-red Lamborghini might be out of range, but how can you figure out what amount you can qualify for? Here are some things to look at:
Figure Out Your Debt-to-Income
Your debt-to-income ratio (DTI) is a huge factor in how much loan you can afford, because it shows lenders whether you have enough money left at the end of the month to make a payment. DTI is calculated by adding up all your monthly expenses: rent or mortgage, student loan payment, credit card payments, other debt payments, and dividing the sum of those monthly debt payments by your monthly income. Debt/Income. Lenders want to see a DTI of 40% or less—the lower the better. The higher your DTI, the bigger the risk that you won’t be able to cover all those bills and you might fail to make payments or even default on the loan. Some lenders will still give you the loan, but they’ll charge you a lot more interest to account for the higher risk they’re taking.
So, one way to estimate how much of a loan you qualify for is to calculate how far you are from that 40%.
Monthly income: $8,000 (how much you earn every month, before taxes)
DTI 28% = $2,240 (how much you pay in current debt payments every month)
Now add 10% more debt to account for your auto loan, in this case $800 a month, which would bring your DTI to 38%. That’s still under the 40%.
So, if you paid $775 a month for 60-months at an average interest of 3.11%, then you could possibly qualify for a car of just over $40,000, plus taxes and interest.
Don’t forget to leave a little wiggle room for the interest the lender will charge depending on your credit score and the length of your loan.