Introduction

You've decided that you definitely want to buy a car and you're trying to figure out how much you can afford. As strange as it may seem, the money a financial institution will lend you and how much you can truly afford may be two completely different amounts. Sure, it feels great to hear a lender say you can have the money to buy the car you've always wanted. Two years later though, when you realize all of your money goes into the car with nothing left over, that good feeling will fade.

When considering your new car payment, make sure you include the other costs that go along with owning it.Expenses such as gas, insurance, license plates, immediate repairs, taxes, and ongoing maintenance can add up to more than you're currently spending. Are you already feeling a pinch at the end of the month? Is this something you can really afford? Give these questions a lot of thought and good honest answers.

Finally, before you begin your search for that new vehicle, make sure you've also been preapproved for a loan. With a preapproval you'll know what cars are in your price range and which ones aren't. Failure to get preapproved is a mistake many car buyers make that often causes unnecessary headaches.

What are Ratios?

When you apply for a loan, the lender will look at your entire financial picture to determine how much money they will let you borrow. They'll use several guidelines including one called the debt to income ratio.

This ratio compares your total debt to your total gross income (including your spouse's) and is important when determining someone's ability to repay a loan. No more than 28% of your gross income should be used for housing expenses and no more than 40% should be used for your total debt. Total debt includes your mortgage plus any auto loans, credit cards, and loans of any other kind. If, for example, 20% of your total gross income already goes to pay your current debt, 20% of your gross is the maximum most institutions will lend you to buy a car. Again, this is a guideline and actual percentages may vary a little depending on a particular borrower's circumstances.

Another ratio banks look at is the amount of down payment you have. Generally, banks look for a 10-20% down payment of the total cost of the vehicle. Purchasing a car that is selling for $15,000, for example, would require a down payment of $1,500 - $3,000. Your down payment can come from cash you saved, the trade-in of your current vehicle, or a combination of both.

Increase Your Borrowing Power

If you are disappointed with the amount of money you're able to borrow, it's possible that you'll have to come to terms with buying a less expensive car. Before you do though, consider some options that can increase your borrowing power.

• Reduce your existing debt by paying off current loans.
  
• Wait to apply for a vehicle loan until your household income increases.
  
• Search for financing options that require a lower down payment and smaller monthly payments.
  
• Put together a larger down payment to reduce the amount you need to borrow.
  
• Keep your eye on the market and wait for interest rates to drop.

You can obtain expert help answering your questions when you contact the loan professionals at 1st Source Bank. They will work to help you understand your options and guide you through the entire car buying process.

Other Calculators

To help you determine how much money you will be able to borrow, 1st Source Bank provides several calculators to make the task quick and easy. Just choose one or more of the options listed below and click. You'll be connected with a calculator that will aid you in establishing how much you can afford to borrow.

• What will my payments be for a fixed rate loan?
  
• What will I save if I make extra payments?
  
• How much car can I afford?

Remember that the amount of money you are able to borrow and the amount you can comfortably afford may be two very different figures. Making sacrifices to purchase a vehicle is well worth the effort, however discovering that you've become "car poor" because you can afford nothing else is a situation you may soon come to regret. Only you know the kind of lifestyle you want to maintain and how much that will change when you purchase the vehicle.