How do lenders establish how much I can borrow when I'm buying a car?

How do lenders establish how much I can borrow when I'm buying a car?

— Martin L., Medford

The answer to this simple question is both simple and complex.

We consulted with Lithia Motors vice chairman Dick Heimann, who knows a thing or two about financing vehicles.

Heimann told us banks, credit unions and the lending units of auto makers all have different guidelines, but it all boils down to debt to income.

"Then they factor in how much they want to allow, and that's where they differ," Heimann said.

When the salesman asks, "What kind of monthly payment can you afford?" he's cutting to the chase.

Lenders don't consider whether a buyer can make a $600 monthly payment in a vacuum.

Normally, if you add a house, car and other monthly payments into the equation, Heimann said, the solution is upping the down payment.

"They lender says they need more investment in the car," he said.

Some lenders will look at a buyer's overall income, another will remove income from the equation.

"They'll think that overtime can be cut at any time," he said.

Others will look at a $1,000 monthly house payment and factor in the deductible interest that will come back in a tax return.

"You've heard it said that many Americans are only one paycheck away from bankruptcy," Heimann said. "Still lenders will look at someone who has a house payment, a car payment and alimony. They will see that for 15 years, they've never been late on their payment and never defaulted because they've been on the job 15 years."

The guy who is slow on his payments and had four jobs in the past 10 years, however, may not get approved.

"There are a lot of moving parts in the debt-to-ratio equation," Heimann said.

Ultimately, how you've performed in servicing your present debt will go a long ways toward determining future approval, he said.

"If you are trying to trade in a car, and are already 15 days past due on your current loan, they'll figure it out."

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