When Is A Car Payment Too High?
When Is A Car Payment Too High?
Sometimes your necessities end up becoming too expensive due to factors out of your control. When it comes to financing your new car, you need to look out for these points that decides the amount you pay every month.
How Much Down Payment Can You Make?
Most folks offer their existing car to trade in for a new one. The amount you get for this trade factors into your down payment. However, if you can make even a small addition to your down payment, it will go a long way to reduce the amount you need financing for. This reduces the loan amount and you won’t have to pay more on interest. Dipping into your savings to pay an additional $1000 or more as a down payment will help you avoid setting a monthly payment that’s too high.
How Much of Your Income Can You Set Aside for Monthly Payments?
Financial experts recommend spending less than 20% of your income on your monthly car payments. However, if you have other monthly loan payments such as a home loan, personal loan, or education loan, experts recommend caution while planning how much you want to pay for your car. If you have additional payments, you may want to find alternatives to buying a new car such as leasing, car subscriptions, car-sharing, or taking public transport until you can afford to make monthly payments on a new car. Once you have bought your car, you still have to pay for car insurance, fuel, and maintenance expenses.
Term of Loan
After you decide how much you need to pay, pay attention to the term of your loan. You might want to adjust the term to be longer so you pay less monthly. However, extending the term more than four years is a mistake. Each month you continue the loan, you will need to pay more on interest.
Despite your car’s reputation, it will depreciate in value. Toyota has an excellent track record, but even a Toyota car will depreciate considerably, especially over the first five years.
What’s Your Credit Score?
If your credit score is over 700, you can expect to pay an interest rate around 3%-7%. If your score lies between 500 and 700, then you’ll have to pay an interest that’s around 7-12%. If your score is below 500, beware of ready loan providers who offer seemingly good loan plans. They are known for the high rate of interest, and can put you at a loss. If you have a low credit rating, it’s highly recommended that you choose an alternative to buying a new car.
The key to staying balanced financially is to keep costs low and savings steady. Find what works for you and your family financially, and opt for the best way forward.
Advertised price excludes tax, tag, title, $699 closing fee per TCA 55-17-114 and all optional dealer installed items selected by the purchaser. Pricing subject to market conditions, customer provided trade in vehicle, and dealer assisted financing; otherwise price may increase $985. Call dealer for accurate pricing. Price includes non-optional dealer installed accessories.
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