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Minimum salary to qualify for car finance: what you need to know

Learn the typical borrowing requirements if you're looking to fund your vehicle with a loan.

Payday loans are expensive forms of credit and shouldn’t be used to fix long-term financial issues. People should avoid payday loans if it will put their budget under strain, as late fees for payday loans can build up quickly and result in debt.

You’re ready to buy a car — and even have your eye on a new set of wheels. But can you afford it? Before taking out any kind of car finance, understand what your personal borrowing power is tells you what you’re eligible for and can keep you from choosing terms you can’t afford. Let’s take a look.

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Calculate how much you can afford in 4 steps

There are four main steps to determining what type of car finance you can afford.

Step 1: Calculate your monthly car finance budget

Go over your monthly expenses and figure out how much you can comfortably afford to set aside each month for a car loan payment. A good rule of thumb to avoid spending more than 40% of your monthly income on debt payments — anything much higher may be seen as a red flag.

When it comes to your vehicle, financial specialists recommend that no more than 20% of your monthly take-home pay should be used towards car expenses.

Step 2: Budget your down payment

While it’s possible to find a car finance with no down payment, most lenders require at least 20% upfront when you apply for car financing. Look into your savings to figure out how much funds you have available to put down without disrupting your monthly spending habits.

Don’t have any savings? You might want to hold off on the car loan until you do.

Step 3: Add up the car finance costs

Use your monthly repayment and down payment to calculate how much you can afford to spend on a car finance over different loan terms — typically car loans run from one to five years. This is your budget range for all car loan costs, including interest and fees.

Step 4: Set a car buying budget

Use the loan amount to come up with a target purchase price for your car. Factor in the down payment you’re able to afford — this reduces how much you need to borrow — as well as other costs like sales tax and document fees.

How do lenders determine my borrowing power?

Lenders consider your monthly living costs and weigh them against your monthly income to see whether you can afford loan payments. However, it gets more involved when you start factoring in:

  • Multiple incomes
  • Credit card and/or loan debts
  • People who are financially dependent on you

So, it’s easy to see why lenders in South Africa may not set a minimum salary to qualify for car finance; instead many will determine your suitability for a loan based on your personal circumstances.

Debt-to-income ratio and borrowing power

Another important factor that’s rolled in to how much you can borrow is your debt-to-income ratio (DTI). You can have a hard time qualifying for a loan if your DTI is above around 40%. Ideally, it should be around 20% when you apply for a car loan.

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Find the right personal loan lender with Fincheck

  • Partners with a range of lenders
  • Lets you compare personal loans of up to R175 000
  • Hassle-free online application process
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What else should I consider?

You should also consider recurring monthly expenses before you apply to give yourself a detailed breakdown of your budget. This will help you figure out if you have room for another expense. Look at your personal finances, including:

  • Essentials. Think about how much you spend on housing, food, utilities, commuting and other essentials you can’t live without.
  • Extras. What do you spend when you go out to eat? Is shopping for clothes twice a month something you can give up? An ideal loan won’t require you to make significant lifestyle changes. If you’re stretching your budget, a car finance may not be the right financial move.
  • Costs of owning and maintaining a car. These include vehicle registration, licensing, insurance, gas, repair costs and countless others. Leave yourself some financial leeway.
  • Debts. Loan payments and credit card bills can add up each month. If they’re not taken care of when the bill is due, you could damage your credit score.

How can I increase my borrowing power?

There are a few different ways to convince lenders that you’re capable of taking on a bigger car finance; however, it may take some time and effort. A few strategies you can use to get a bigger loan in the future are:

  • Spend less. Drawing up a budget and sticking with it can free up some cash flow and help you create less debt. And once your start spending less, you can take those savings and knock down whatever debt you’ve accumulated in the past.
  • Improve your credit score. Paying bills on time, decreasing your debt-to-income ratio, using your credit card responsibly and correcting mistakes on your credit report can nudge your score in the right direction.
  • Eliminate your debt. Cutting your debt minimizes your credit utilization ratio, showing lenders that you’re not desperate for a line of credit.
  • Ask for a pay raise. Doing a great job at work and think you deserve a raise? Draw up a case as to why you deserve a pay increase. This extra bump will decrease your debt-to-income ratio and make you appear as a more attractive borrower.
  • Compare, compare, compare. Every lender may look at your ability to borrow differently. This is why it’s extremely important to get a few quotes and do your research before moving forward with the first loan offer.
  • Get a cosigner. A cosigner promises to take care of the loan if you default, increasing your borrowing power. Only ask someone to be a cosigner if you’re sure you’ll have no problem making the payments on your loan.

Bottom line

Remember to take into account all fees and taxes including the cost of the vehicle when determining how much you can spend on a car. Now that you know what to expect from lenders and what kind of borrowing power you have, you’re ready to compare vehicle finance.

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