When Is A Car Payment Too High?

When Is A Car Payment Too High?

The cost of cars has risen so much that almost no one pays for their car in cash. Most people take a car loan to finance their car purchase. Today, the costs of cars are rising faster than incomes. Before you shop for an SUV or a car, you need to ask how much you can afford. Here we have discussed important things related to a car

When Is A Car Payment Too High?

Budgets are important. Before you walk into a car dealership, you need to find out what monthly payments you can afford. If the car payment is exceeding 35 percent of your income, the car payment is too high. If you ignore the high car payment, you are bound to face financial difficulties in the near future. If your debt-to-income ratio is high, a large part of your income will go towards loan repayment, leaving less money for household expenses.

You need to understand the car payment is not the only expense related to the car. There are several other expenses like fuel and maintenance charges that you need to consider. You might be having other payments towards your home loan, personal loans, utility bills and other expenses. If your car payment is too high, you are more likely to miss payments which will lead to fines and damage your credit score.

How to Balance Your Budget and Car Payment

According to financial experts, you can follow the 50-30-20 rule. In this budget model, 50 percent of income is dedicated to car payment and expenses including fuel and maintenance expenses. Thirty percent of your income is dedicated to travel, entertainment and other expenses, and 20 percent of your income is dedicated to paying off credit card bills and contributing to long-term financial goals.

Avoid High Car Payment

To avoid a high car payment, you can consider making a big down payment that will automatically reduce the car payment. For example, consider making a 20 percent down payment. Make sure the loan tenure is not more than four years. While your focus should be avoiding a high car payment, don’t ignore the total financing costs. The longer the tenure of the loan is, the more you will pay in interest, making the car costlier.

One important thing you should know is that the rate of interest depends on your credit score. If you have a lower credit score, the interest rate will be higher. Hence, you need to approach several lenders and compare the rate of interest offered.

How To Deal With A High Car Payment

If you are unable to make car payments on time, talk to your lender and try to find a solution. Many lenders will agree to extend the loan tenure to reduce the monthly car payment and make it more affordable for you. Though you will end up paying more money, you can prevent the car from being repossessed, which would also harm your credit score.

There are several online tools that help you check the affordability of a car. When purchasing the car, don’t focus on car payments alone but also pay attention to the car’s price.