Hello, I'm currently in 2 minds as to what I should do in regards to whether I should borrow money to purchase a new car or use some of my savings which I've put away for a house deposit? I'm hoping to start applying for home loans in a few months time but I'm in need of a new car asap. I'm only looking to purchase a car used for around $15k but don't really want to touch my deposit for a house. Will the banks look at me having a bigger asset in a $15k car better than not having a car at all even though I do owe money on the car? I currently have no debts whatsoever and no credit cards… any help would be great.
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Good question as there are pros and cons for buying the car with cash or taking out a car loan. My initial suggestion is to speak to a mortgage broker and financial adviser to discuss your situation. Banks essentially look at two things when lending money, your Loan to Value Ratio (LVR) and Debt Servicing Ratio (DSR).
LVR references how much deposit or how much equity you will have in the property and DSR refers to how much of your income goes to servicing debt. If your LVR is ‘tight’ or ‘high’ than you need to maximise your savings/deposit therefore taking out a car loan maybe your best option as these frees up your deposit. If your DSR is ‘tight’ or ‘high’ than it may be best to buy the car outright as a car loan would increase your DSR potentially limiting the size of the loan you wish to obtain.
Your second question regarding the banks looking at you having a bigger asset base if you have a car, loan or no loan. This has minimal bearing on the banks decision making process of offering you a loan. However, due to you not having any debts and minimal credit history, a car loan will provide the banks with some history of you paying off a loan. A mortgage broker would be able to confirm if this is a relevant issue for you or not.
All the best.
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