When Is A Car Payment Too High?

When Is A Car Payment Too High?

Purchasing a car is a big investment for many people. Most people take an auto loan to finance their purchase and many car buyers don’t think about their budget or other expenses while purchasing the car. They end up purchasing an expensive car like an SUV without thinking about the high car payment. Below, we discuss high car payments and ways to avoid them.

When Is A Car Payment Too High?

A car payment is considered too high if it is more than 30 percent of your total monthly income. According to financial experts, the car payment should not be more than 15 to 20 percent of your total income. When you are buying a car, you should not overlook other loan payments, utility bills and other household expenses. Besides, a car payment is not the only expense related to a car, as you also have fuel and maintenance expenses.

What Factors Affect Car Payments?

There are several factors that can affect car payments:

Size of Loan and Down Payment: The total loan amount and down payment are important factors that determine your car payment. If you make a bigger down payment, your loan amount will be reduced which automatically lowers your car payment.

Credit Score and Debt-to-Income Ratio: If your debt-to-income ratio is too high, lenders are more likely to levy a higher interest rate on the auto loan. If the debt to income ratio is lower, lenders will approve the auto loan with lower interest. The rate of interest affects the car payment — a higher interest rate will result in higher car payment and a lower interest rate will reduce the car payment to some extent. Also, your credit score has an effect on the interest rate. People with higher credit score get auto loans with lower interest.

Loan Tenure: If the loan amount is bigger and the loan tenure is shorter, it will result in a higher car payment. According to financial experts, you should not choose a loan tenure that’s more than four years, otherwise, you will end you paying more money for the car. In fact, you should opt for the shortest loan tenure that you can afford.

How to Avoid High Car Payments

Budgeting is an important aspect to ensure you can make payments comfortably. According to financial experts, you can follow the 50-30-20 rule to keep things under control. For example, you need to keep 50 percent of your income to satisfy your housing needs, food, and transportation. This includes your car payment. Don’t forget to consider fuel expenses and maintenance costs, too. You can reserve 30 percent of your total income for travel, entertainment and other non-essential needs. Twenty percent of your total income should be reserved to pay your credit card bills and achieve your long term financial goals.

Before you go to a car dealership, determine the maximum amount you can afford to spend on a car. If you ignore this aspect, you will end up buying a car out of your budget and you will find yourself in a situation unable to pay the high car payment.