When Is A Car Payment Too High?

When Is A Car Payment Too High?

Purchasing a car should always be a calculated decision. Many people ignore their income to debt ratio and buy an expensive car without thinking about car payments. This ends with a car payment that’s too high to pay monthly. To make things easy for you, here are some important things to keep in mind about car payments.

When Is a Car Payment Too High?

If a car payment is more than 30% of your total income, that’s too high. According to financial experts, the car payment should be 15% to 20% of your total income. Don’t forget the fuel and maintenance expenses while purchasing a car. Here are some factors that affect car payments.

Your Income, Debt, and Credit Score- Lenders look at the debt to income ratio while approving a car loan. If the debt to income ratio is low, they can offer you attractive lending terms like lower interest. Your credit score also plays an important role in the interest rate offered. If you have a high credit score, the lender will offer you a lower interest rate. If you have more debts, offering a loan is riskier for the lender, since they can’t be sure if you will make your payments on time. If the interest on the car loan is lower, your monthly payment will be lower.

Down Payment, Price of the Car, and Loan Tenure- Putting down a sizeable amount toward a down payment not only reduces the loan amount, but it also shows you’re serious about the investment. If you pay a big amount as a down payment, the car payment will be lower. Also, if you opt for a longer repayment tenure, your monthly car payment is lowered in the short term, but you end up paying more for the car. According to financial experts, you should limit the loan tenure to 4 years or less.  

Tips to Avoid High Car Payments

Avoid Extras

The salesperson at the car dealership will try and convince you to buy optional extras like paint protectant, rust proofing, window etching, extended warranty, and fabric protection. Before giving in to the pressure, make sure you need these things. If you avoid these extras, you can save a good amount of money.

Look for Financing Options in Advance

You should not rely on dealership financing alone when purchasing a car. Look for other financing options like loan offering institutions, banks, and lenders. If your credit score is good, you might get a better deal on the loan elsewhere.

Negotiate with Car Dealership

After you decide which vehicle to buy, don’t agree to pay the sticker price right away. Negotiate with the car dealer to lower the price. You can start your negotiations by lowering the price by 1% to 5% and see how the dealer responds. Many car dealers would agree to lower the price a bit to prevent losing the sale opportunity.

Take other payments and household expenses into account when calculating what car payments you can afford. If your car payment is too high, talk to the lender about different options available to lower the car payment.