When Is A Car Payment Too High?

When Is A Car Payment Too High?

Purchasing a car is one of the biggest investments in every individual’s life. For many people, a car is an emotional purchase and they seldom think about affordability and about their needs during a car purchase. The result is financial difficulties. Here we have discussed important things related to a car payment.

When Is a Car Payment Too High?

According to financial experts, if the car payment is exceeding 30% of your total income, it can be considered a high car payment. Many people forget budgeting during a car purchase. You should take into account other loan payments, household expenses, fuel, and maintenance expenses while purchasing a car.

Follow the 20/4/10 Rule When Purchasing A Car

To avoid high car payment, you need to follow the 20/4/10 rule when purchasing a car:

  • Make at least 20 percent down payment on the car. This will reduce the loan amount and the car payment won’t be high.

  • Make sure the repayment period of the car loan is four years or less. If you opt for a longer loan tenure, you end up paying more interest on the principal loan amount. In other words, you end up paying more for the car

  • When purchasing the car, ask for the final price and calculate the car payment in advance. According to financial experts, the car payment should not be more than 10 percent of your total income. The majority of salespeople will only tell you about car payments and loan tenure. Ask for the sticker price of the car to determine whether the car is within your budget.

Budgeting Tips When Purchasing A Car

Arrange Financing in Advance: Remember that the car dealership is only one of the financing options you have when purchasing a car. Many people prefer financing options from car dealerships due to the convenience. While doing so they completely ignore the interest rate on the car loan. When you decide to purchase a car, check your credit score and approach lenders, banks and loan offering institutions. It is more likely that a lender will be ready to offer you a lower interest on the car loan.

Don’t Buy Extras: The salesperson at the car dealership will be eager to sell you many extras and add-ons that increase the loan amount. Before agreeing with the salesperson over extras, determine whether you need these extras. Some of the add-ons sold during car purchase include paint protectant, fabric protection, rustproofing and an extended warranty. Remember these things are not complementary and the costs of these add to the car’s final price.

Don’t Pay the Sticker Price: Don’t assume that you will have to pay the sticker price of the car. You can find out what the dealer paid for the vehicle and start negotiating. You can reduce the sticker price by one to five percent and see if the car dealer is willing to lower the price. Sometimes, car dealerships agree to lower the price in order to avoid losing the sale opportunity.

If you are considering financing options offered by a car dealership, negotiate to get a favorable deal. Before signing the papers, make sure you can afford the car payment.