Your borrowing power is how much money you’re able to borrow without putting too much pressure on your finances. This guide will take you through how to work out your own borrowing power and how lenders determine your borrowing limits when you apply.
Why is it important to understand your borrowing power?
When you apply for a type of credit such as a car loan this will be listed on your credit report. It will be listed whether it was approved or not. If there are several enquiries for credit on your credit report it can be a red flag to lenders and can stop you from being approved for loans.
Understanding your borrowing power can help you limit the number of applications and enquiries you need to make as you’re only applying for loans that you can afford. It's important to compare a lot of different offers but you don’t want to apply for too many different loans. You also don’t want your credit history damaged by any rejections you receive.
Calculate your car loan borrowing power
You can use the calculator below to get an idea of your borrowing power.
How do lenders determine your borrowing power?
Most lenders use a formula called the Household Expenditure Method (HEM) to determine your borrowing power. This is the closest thing to a one-size-fits-all approach to calculating these factors. It involves dividing all household expenses into one of three groups: the essential (food, utilities, etc), the discretionary (entertainment, childcare, restaurants) and the luxury (vacations, household staff). The HEM is determined by looking at the median spending on essentials by Australian households, and the 25th percentile spending on discretionaries.
These two values are added together to get the HEM, a number that changes and is updated each year. The number is adjusted in a particular way depending on your location, whether you’re part of a single or partner household and whether there are any children.
The lender will ask you what your monthly expenditure is, and then look at the HEM. The higher of the two sums is used as your monthly expenditure when determining your borrowing power.
The HEM is based on the Australian Bureau of Statistics spending data. It is regularly updated based on the more recent information.
Not all lenders use the HEM. Some have their own formulas or use similar alternatives like the older Henderson Poverty Index (HPI).
How to work out your monthly expenditures
You will generally be required to provide your monthly expenditures to your lender when you apply, despite them making their own calculations as well. For car loans, most lenders will typically want you to give them a single figure, but some might want a more detailed cost breakdown.
Consider how much you spend on essentials. This includes housing, food, utilities, transport and other things you can’t live without.
Factor in how much you tend to spend on discretionary costs and luxuries each month. Resist the urge to exclude these from your calculations. An ideal loan won’t require you to make significant lifestyle adjustments, although this isn’t always possible.
Remember to consider the cost of owning and maintaining a car. There are numerous one-off expenses as well as ongoing costs. These include vehicle registration, licensing, compulsory insurance, additional insurance, petrol, repair and maintenance costs and countless others. However, do not include these in your monthly expenditures unless you already have and are paying for a different car, because your lender will factor them in for you. Do bear this in mind, however, and leave yourself some financial leeway for the costs.
Compare your car loan options
Wisr Secured Car Loan
Wisr Secured Car Loan
From
5.19 %p.a.
fixed rate
From
6.08 %p.a.
comparison rate
Borrow up to $50,000
No monthly fees
No early repayment penalties
100% confidential application
Wisr Secured Car Loan
A Wisr car loan is a flexible loan that can be used to purchase new or used cars, as well as motorbikes, boats, caravans and other expenses.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
The Australian appetite for streaming is soaring as pricier unlimited NBN plans dominate the market, with entry-level, affordable plans few and far between.
You'll receive a fixed rate of 5.49% p.a. Take advantage of a competitive rate, pre-approval and no early repayment fees when you finance a car under two years old.
You'll receive a fixed rate from 5.69% p.a. A larger loan of $5,000 or more to help you buy a new or used car. 5-hour pre approval available and no ongoing fees.
You'll receive a fixed or variable rate depending on the lender you are approved with Apply for up to $100,000 and use cash or trade in a vehicle to use as a deposit. Optional balloon payment available.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We compare from a wide set of major banks, insurers and product issuers.
finder.com.au has access to track details from the product issuers listed on our sites. Although we provide information on the products offered by a wide range of issuers, we don't cover every available product. You should consider whether the products featured on our site are appropriate for your needs and seek independent advice if you have any questions.
Products marked as 'Promoted' or "Advertisement" are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options and find the best option for you.
The identification of a group of products, as 'Top' or 'Best' is a reflection of user preferences based on current website data. On a regular basis, analytics drive the creation of a list of popular products. Where these products are grouped, they appear in no particular order.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment.
We try to take an open and transparent approach and provide a broad based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labelling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.
Please read our website terms of use for more information about our services and our approach to privacy.
