When Is A Car Payment Too High?



When Is A Car Payment Too High?

The popularity of CUVs and SUVs is leading to larger loans that translate to higher car payments. For most people, buying a new car is largely an emotional purchase where budgetary constraints are often overlooked. The result is higher car payments which disturb the monthly budget and causes financial worries. Here we have made efforts to explain car payments and budget in detail.

Is Your Car Payment Too High?

If your car payment is more than 30 percent of your total income, you can consider it a high car payment. According to financial experts, your car payment should be between 15 and 20 percent of your total income. If your car payment is high, you will struggle to make timely payments which would damage your credit score. Before you go to the car dealership, make sure you calculate how much you can afford. Most car dealers would only focus on the installment and tenure. Make sure you focus on the car’s price and determine whether the car fits in your budget.

Ways To Balance Budget And Car Payment

According to financial experts, you need to follow the 50-30-20 rule to balance the budget and car payment. In this budgetary model, the total income is divided into three broad categories:

  • 50 percent of the amount is reserved food, housing and transportation. This includes your car payment, fuel expenses and maintenance costs.

  • 30 percent of the amount is reserved for travel, entertainment and other non-essential expenses.

  • 20 percent of the amount is reserved for paying credit card bills and to meeting long-term financial goals.

How To Avoid A High Car Payment

The best way to avoid a high car payment is to pay the maximum down payment possible. This will reduce the loan amount and also make car payments more affordable. You should not opt for a long loan tenure as you will end up paying more interest on the loan amount. According to experts, you should opt for a loan tenure of four years or less. To avoid high car payments, be realistic about your budget and purchase a car that fulfills your needs and also fits in your budget. Today most SUVs and CUVs are priced above $20,000. According to financial experts, the cost of the car should not exceed more than 50 percent of your annual income. This will ensure you do not face the problem of high car payments. Here are some more tips to avoiding a high car payment.

  • Before approaching the car dealership to get financing, approach banks, loan institutions and private lenders for interest rates. You need to compare interest rates and select a lender offering lower interest rates. This will reduce the high car payment to some extent.

  • You should not agree to pay the sticker price. Negotiate with the car dealer and don’t fall for extras offered by the dealer.

Don’t forget that even if the installments are not high at the moment, interest rates rise annually and the rise in interest might be four percent annually on the average. This could increase your car payment significantly. Hence the decision to purchase a car should not be taken lightly and you need to ensure you never face problems like high car payments.


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