Determining the loan amount you can afford comes down to a number of different variables. Not everyone should request the same amount of money because everyone has different incomes, down payment amounts, and credit scores. Because there is so much to consider when deciding how much you can afford, it’s good to look over your personal situation before making your first move.
ConsiderYour Down Payment
The amount of money that you have to put down on the car reflects largely on the loan amount you should request. For instance, if you are purchasing a $20,000 vehicle and have a $2,000 down payment, you’ll need more financing help than a person who has $5,000 to put down on the vehicle. And of course, the more financing you need, the higher your monthly payment will be. Determining what your interest rate will be based on how much you have for a down payment can help you estimate your loan expenses.
Do You Have a Trade-In?
Having a trade-in is another large factor that can help you determine what loan amount you can actually afford. If you are interested in the same $20,000 vehicle and have a trade in for $8,000, you’ve knocked a considerable amount off of the price. This will reduce how much you’ll need in financing, which in turn will lower your monthly payments.
What is Your Credit Score?
Probably one of the largest determinants in how much you’ll end up having to spend on your car – aside from its actual price – is your credit score. The average bank interest rate on a new car is hovering at 7%; however, if your credit score is lower than 680, you might see that interest rate skyrocket – right along with your loan amount.
Some say that the loan amount you consider should fall anywhere between 9% and 20% of your net monthly income. But as you can see, there are other criteria that helps dictate how much you’ll actually pay for a car. So, before you calculate what you can spend based on income alone, it’s good to look up your free credit report online at sites like Go Free Credit, and take into account your down payment and trade-in first.