How Your Auto Loan Limit Is Determined: The Main Factors
Posted on: 26 May 2022
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If you're in the market for a new or used car, you're likely to encounter the term "auto loan limit." This is the maximum amount your lender will allow you to borrow to purchase a vehicle.
Your auto loan limit is based on different factors, aside from your monthly income. Knowing what these factors are and how they affect your loan limit can help you get the best deal possible on your next car. Keep reading to learn more.
Your Credit Score
A strong credit score indicates to lenders that you're a responsible borrower who is likely to repay your loan on time. As a result, you'll be able to borrow more money and get a lower interest rate.
On the other hand, a weak credit score will limit your loan options and make it more difficult to get approved for a loan. Lenders will view you as a higher-risk borrower and offer you a lower loan limit at a higher interest rate.
So if you're looking to finance a new car, check your credit score and take steps to improve it before you apply for a loan. If you're not sure what your credit score is, you can order a free credit report from one of the major credit bureaus.
Remember to check your report for any errors that could be dragging down your score. This way, you'll be in a better position to get the best terms on your loan and save money in the long run.
The Size of Your Down Payment
A larger down payment indicates to lenders that you're serious about repaying your loan and less likely to default on the loan. A sizeable down payment also gives you more equity in your car. As a result, you'll be able to borrow more money and get a lower interest rate.
If you place a smaller down payment, you'll likely be approved for a much smaller loan or one with a high-interest rate. The argument is that in case you default on your loan, your lender has more to lose if you've placed a smaller down payment.
If you're not sure how much of a down payment you can afford, look at your budget and see how much money you can set aside each month. Once you have a number in mind, you can start saving for your down payment before you begin shopping for cars.
Keep in mind that most lenders set a limit for the minimum amount you can place as a down payment. Consult with your lender to understand more about the terms of your auto loan.