How much can I afford to borrow for a car loan?

Get a car loan that works for you by finding out your borrowing limits.

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Your borrowing power refers to how much money you’re able to borrow without putting too much pressure on your cash flow and without the lender rejecting your application. Before taking out a car loan it’s important to have an idea of what your borrowing power is.

It is also important to note that the Monetary Authority of Singapore (MAS) imposes maximum loan-to-value (LTV) ratios and loan tenure on all motor vehicle loans in Singapore. For cars with an open market value (OMV) of $20,000 and below, buyers are allowed to borrow up to 70% of the purchase price. For cars with an OMV above $20,000, buyers are allowed to borrow up to 60% of the purchase price.

Why is it important to understand your borrowing power?

When you apply for any kind of loan, the enquiry is automatically recorded on your credit report even if you are declined or are approved but decide not to take it. The more enquiries on your report will make you seem like a high-risk borrower, and the less likely a lender will approve you for a loan.

Understanding your borrowing power can help you limit the number of applications and enquiries you need to make as you’re only applying for loans that you can afford. You want to compare a lot of different options without making an excessive amount of credit enquiries, since any rejections will damage your credit rating.

How lenders determine your borrowing power

Once you understand your borrowing power you’ll be able to limit your chances of being rejected for a loan. To be sure, it helps to know how lenders are calculating your loan borrowing power.

In Singapore, lenders consider your credit score before they determine if they should approve your application and whether you can afford the loan repayments. While the exact weightage of your credit score and how it is calculated isn’t publicly known, there are a few crucial factors that the Credit Bureau of Singapore uses in determining your credit score. These can include but are not limited to your expenditure, account activity, existing loans, timeliness in payments, available credit and enquiry activity.

It becomes more complicated when you factor in multiple incomes, dependents, credit cards, other debts and the cost of owning and running a car. These details often cause borrowers to overlook their expenditure and take on more financial commitments than they can manage.

To work out your car budget, you can either use one of the many online car calculators or the finder borrowing power calculator below.

    How to work out your monthly expenditures

    You will be required to provide your expenses to your lender when you apply for their own calculations. For car loans, most lenders will typically want you to provide a single figure for your income and expenditure, but some might require a more detailed breakdown.

    • Consider how much you spend on essentials. This includes housing, food, utilities, transport and other life necessities.
    • Factor in how much you tend to spend on discretionary costs and luxuries each month. Resist the urge to exclude these from your calculations. An ideal loan won’t require you to make significant lifestyle adjustments, but it may be necessary.
    • Remember to consider the cost of owning and maintaining a car. There are numerous one-off expenses as well as ongoing costs. These include vehicle registration, compulsory insurance, petrol, repair and maintenance costs, parking and countless others. However, do not include these in your monthly expenditures unless you already have them for a different car because your lender will factor them in for you.

    Find car loans to compare

    Now that you know what to expect from lenders and what kind of borrowing power you have, you’re ready to compare car loans. Remember to use calculators first to avoid being rejected for a loan and to keep your credit history clean.

    Start browsing car loans to find one you can drive away with without having multiple enquiries listed on your credit report.

    Picture: Shutterstock

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