When applying for a car loan, the lender will require a few key documents in the application, including proof of income, bank statements, and details of existing debts. The lender will assess your income and expenses through these documents to determine your borrowing power. This is the amount you can afford to repay on a car loan without risk of default.
If you applied for a 3-year $20,000 car loan and monthly repayments are expected to be around, say, $600, the lender takes stock of your monthly income and expenses and assesses your ability to meet that monthly repayment. of $600.
Some lenders use what is called the Household Expenditure Measure (HEM) to estimate your borrowing capacity. It divides your household expenses into three categories: essential expenses like food and utilities, discretionary expenses, like childcare, meals, and entertainment, and luxuries, like vacations. Your HEM is compared to the median spending on Australian household essentials and the bottom quartile of discretionary spending.
The HEM is also adjusted according to your location, whether you are a single-parent or partner household and the number of children you have. Lenders will want to know your monthly expenses and compare them with the HEM. To estimate your borrowing power, lenders consider the higher of HEM or actual monthly expenses.