Car Loan Affordability Checks: Everything You Should Know
Car Loan Affordability Checks: Everything You Should Know
Posted on June 10, 2023
You’ll hear the term ‘affordability’ used a lot when researching auto loans. Ever since the financial crash of 2008, financial institutions have been obligated to ensure any borrower they do business with can afford the loan they are asking for. This is the main reason we do an affordability check for a car loan.
It doesn’t matter whether it’s a personal loan, mortgage or auto loan. Affordability checks are now part of the process.
We think that’s a good thing but it does mean more work for you.
Affordability Check for a Car Loan
Every lender has to ensure they aren’t lending money people cannot afford to repay. It’s a basic check but vitally important for everyone’s financial wellbeing.
So, what is an affordability check? How does it work?
An affordability check is actually very straightforward. A lender assesses your total income in a month and looks at how much you have leftover once all your outgoings are taken care of.
If you have enough there to make loan repayments with some leftovers, you pass the affordability check.
If it looks like the repayments use up everything you have each month, you will likely fail the affordability check.
It’s one of the reasons you have to provide bank statements during the application process. So, the lender can see exactly what you have coming in and going out.
They can then calculate how much spare cash you have left over to assess whether you can afford the auto loan or not.
How to Pass an Auto Loan Affordability Check
If you think you will have trouble passing an affordability check, there are a few things you can do to improve your situation.
Pay down any existing debt: Monthly credit card or debt payments will be included in any affordability check. Paying them down as much as possible will lower that monthly payment burden, giving you more spare cash at the end of the month.
Borrow less: You could also consider borrowing less and buying a cheaper car or buying a used one. The lower the loan amount, the more flexibility you’ll have in the affordability check.
More money down: Putting more money down as a deposit on the car can also swing things your way. This also lowers the loan amount, so will have the same effect as borrowing less while also reassuring the lender.
More income: Easy to say, harder to do we know, but getting more income each month can also help. Whether that’s working overtime, getting a side job, working freelance or whatever, more income means more affordability.
Affordability checks on borrowing may seem like an extra hassle, and it is to an extent, but it is there to protect all of us. We don’t want you to borrow more than you can comfortably afford any more than you want to be in debt that you cannot manage.
When you’re ready for a car lease or loan, get in touch with the Ohsweken auto loan experts at Northway Ford for great deals on auto finance.
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