“It is the credit assistance provider’s obligation to make sure that they are not placing you in a loan that would put you in financial hardship and part of this is to also assist with understanding how much you could afford to borrow based off your current regular income and expenses”. Quoted from Cale Simmons at http://www.carloans.com.au/
Each lender will have their own affordability calculations for the same reasons and what it will come down to, is to work out what the maximum monthly repayment you could afford based on your regular income and expenses and also how many years the lender would allow the loan to run for based off the vehicle being purchased.
The maximum monthly repayment and the maximum allowable term of the loan will then establish what the maximum amount you could borrow by working backwards ensuring that the repayment does not go over the maximum payment.
The lender’s affordability calculations are a good guide to what would be spending within your means, as from many years of lending money, their estimated living expenses would have been adjusted year on year based off a guideline called the Henderson Poverty Index and should leave you with enough money to live off after your car loan repayment.
Some borrowers may not consider all general living expenses and believe that they could afford more than what the lender would agree to. The Henderson Poverty Index has taken into consideration an average cost for living expenses such as food, utilities, travel expenses, etc., which is not always accurate to each individual circumstance, but it has been used widely as a guideline as this is very difficult to estimate on a case by case basis and the lender needs to use this to give them an idea if they were to put a borrower in financial hardship or not.
Working out your maximum borrow amount prior to looking for a car can prevent wasting time on searching for the wrong car, so a professional should be able to assist with this prior to shopping.