Car finance can be a great way to spread the cost of a vehicle, which, after a mortgage, may be one of the biggest investments you ever make. In fact, according to data from the Finance & Leasing Association (FLA), over 90% of new cars purchased in 2021 were via vehicle finance.

A large percentage of drivers should be eligible for car loans. But when it comes to how much you can borrow, there are two main factors that will affect this. These are your credit score, along with your monthly income and expenditure. We’ve explored both of these factors in more detail below:

Your Credit Rating

In terms of your credit rating, this can play quite a large role in how much you’re able to borrow for a car loan. Your credit score is used to determine how you manage your money, and the likelihood of whether you’ll be able to keep to the due repayments. Essentially, it’s about risk - how much risk would there be for the loan provider if they were to lend to you? And when a lender is making this decision, they will also consider how much you’re able to borrow. If you have a lower credit rating, you may not be able to borrow as much. 

You can look to improve your credit score though, which may be worth doing before you apply for vehicle finance. A good credit rating can not only mean you might be eligible for a larger loan, it can also mean that you’re offered lower interest rates. Find out more about boosting your credit rating in our blog post ‘What is a Credit Score and How Can I Improve Mine?

It’s also a good idea to learn more about the factors affecting your credit rating. These include your payment history, your outstanding debt, and previous credit applications. 

how much can I borrow car finance

Payment History

When lenders look at your credit file, one of the first things they’ll look into is your payment history. Missing or making late payments towards things like loans and credit cards can have a negative impact on your credit score, and can stop you from taking out further credit. This is why it’s important to stay on top of your finances, and do your best to at least make the minimum repayments.

Not having any history of payment can also lower your credit rating, as lenders are not able to see how you manage your finances, and whether you’re capable of paying on time. For people without a credit footprint, it’s often helpful to take out some form of credit, such as a credit card, and make regular repayments. This should show that you’re a responsible borrower, and other lenders should be more likely to lend to you in future. 

Outstanding Debt 

Any debt you currently have outstanding will mean you have ongoing credit commitments which will have to be factored into your budget. So bear in mind that if you have a lot of current debt, you may need to pay some of this off before you can apply for further credit.

You should additionally consider your credit limit. You don’t want to be using too much of your credit limit - the usual percentage to aim for is around 30%. For instance, if you have a credit card with a limit of £6,000, the maximum outstanding balance you’d want to have is £1,800.

Previous Credit Applications

You may not realise that some credit applications leave a mark on your credit file, which can impact your credit rating. So if you were to apply for a large number of loans in a short space of time, this could damage your credit score.

This only applies with hard credit checks though, not soft credit checks, which are not reported on your credit file. Make sure you find out which type of check is carried out before making a loan application. You can rest assured that making an application with Wheelie Good Finance won’t impact your credit score, as we only undertake soft credit checks.

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Your Monthly Budget

As well as looking at your credit rating, lenders will also look at your monthly budget when making a loan decision, and determining how much you can borrow. They will therefore ask how much you earn each month, and request a breakdown of your outgoings. This will include things like housing costs, priority bills, food, and other essentials. Your other credit commitments will also be taken into account.

When these expenses have been added up, they can be subtracted from your income to work out your disposable income. This is the amount each month that can be used to cover luxuries and unexpected costs. Your car finance payment would also need to come from your disposable income, leaving enough for you to still be able to cover any other expenses that crop up.   

Monthly Loan Instalments

Once your current budget has been calculated, the lender will then factor in the proposed monthly payments for your vehicle loan. For instance, if you were borrowing £4,000 over two years, your monthly instalments could be around £180 per month. The lender will need to check whether such payments would be affordable, with your disposable income in mind.

One way of making smaller monthly payments of course is to spread the instalments over a longer period of time. If you were not able to afford the £180 payments mentioned above, you could pay back over three years, making repayments of around £124 a month. Most lenders allow you to spread the instalments over up to five years.

Use a Car Finance Calculator

If you’re looking to take out a vehicle loan, one of the best things you can do is use a car finance calculator. This can provide you with estimates of how much you can afford to borrow, the interest rates, and your monthly payments. And best of all, this won’t impact your credit score. 

Do bear in mind though that when you apply for vehicle finance, you shouldn’t necessarily opt for the maximum amount you can borrow. Generally speaking, the higher the loan amount, the larger the monthly repayments, and you don’t want to end up borrowing more than you can comfortably afford to repay. So consider how much you’d need to borrow in order to buy your dream car, and then use a car finance calculator to get a rough idea of the monthly instalments. 

At Wheelie Good Finance, our car finance calculator is simple to use, and can help you better understand your options. It even takes into account your estimated credit score, so the results should be more accurate. Get started today to see how much you could borrow to fund your next set of wheels!