Car Loans and Credit Capacity
Question: Dear Cynthia: I recently applied for a car loan and was asked about my credit capacity. How do you determine your credit capacity?
Answer: You can determine your credit capacity by totaling your monthly loan payments, including credit cards, student loans, car loans and any other monthly payments. Do not include rent or mortgage. Then list your monthly income after taxes. Now divide the total owed by the total earned. For instance, you have $500 per month in loans and your net income is $2000. Divide your monthly payments ($500) by your income ($2000). That's 25% of your net income spent on credit. You are considered to be in the debt danger zone at 20%. Consider reducing your debt level by cutting your spending and diverting those funds to your credit payments. If you're already at 25%, it is not a time to take on additional debt.
Source: Dollar, P. (1999, January/March). Talking dollars makes cents.
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