Car loan NZ providers will look at certain key numbers to determine if an applicant is in a good position to borrow money or not. They do this to minimize their risk and maximize their profits. They are keen to provide aid to individuals who are likely to pay them back. It’s not just about character, which may be gleaned from the credit history. It is also about the current financial situation which can restrict a person’s ability to pay despite his best intentions. Three ratios are vital in the applicant’s evaluation: the loan to value ratio, the debt to income ratio, and the payment to income ratio.
The Loan to Value Ratio
This is the percentage of the Car loan NZ that the buyer intends to borrow. For example, he might want to purchase a vehicle that is worth $25,000. Lenders are unlikely to provide the full amount. Instead, the borrower will have to shell out cash for the initial down payment which is usually 20% or $5,000 in this case. The remaining $20,000 can then be loaned with interest. The loan to value ratio is 80% in our example. The lower this is, the better the loan terms can be. A buyer that shoulders 40% for the down payment will demonstrate financial strength and low risk. The lender may lower the interest because of these. On the other hand, a mere 10% down payment does not inspire confidence and may result in higher interest.
The Debt to Income Ratio
The debt to income ratio will need to stay within a manageable range. Most lenders will define this to be within 0 to 35% of the income. That means at least 65% of what the individual takes home can still be used for other expenses which is a lot of wiggle room. They can still approve applications even with up to 50% DTI but they will do so with more caution. If the DTI is above 50%, then a person should probably start rethinking finances and going to credit counseling before taking out a new loan.
The Payment to Income Ratio
This is the fraction of the monthly income that will be swallowed by car payments should the loan be approved. It needs to be a small portion of the whole. Most lenders will not let this exceed 20%. Some will cap it at 15%. The lower it is, the better for the borrower since it won’t be that much of a burden.
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