When Is A Car Payment Too High?
Getting around without your own car is a challenge, especially if you’re hard pressed for time. Taking the subway or a bus is a temporary alternative but when you need to drop your kids off at school, get to work on time and run errands, you can’t always depend on the bus. So, the best way to get around is to get your own car. However, taking out a loan could be a financial strain if the monthly installment is not right for you. Here are a few pointers on how you can identify and also avoid setting up car payments that are a bit too high to handle.
Which Car Is Right For You?
How much do you travel? How many people do typically transport? What kind of weather will you be traveling in? These are the kind of questions that you need to ask yourself before choosing your car. Once you have an answer to each of these questions, you can narrow your search down to competing car models in the same segment such as Hyundai Tucson and the Volkswagen Tiguan for example. You can then compare specs, prices and the various pros and cons to decide on which car suits you best. In case the car you choose is priced too high, you can even consider buying a pre-owned car, which will cost much less.
How Much Of Your Income Are You Planning To Spend On Monthly Payments?
Keeping a healthy balance on your spending is not only a good habit but also helps you stay financially stable. It will also help your credit score stay stable. So, financial planners and money management experts everywhere agree that the ideal amount to set out for a monthly car payment is about 30% of your income. If the amount falls short a little, you can adjust the amount from your entertainment expenses budget.
What Interest Rate Do You Have To Pay?
If your credit score is low, you’ll have to pay a hefty interest rate, which is not advisable. This is why it’s a good idea to spend a few months to try and improve your credit score by making your other monthly payments on time, paying off your credit cards on time and paying bills on time. This will improve your credit score quite quickly, thus enabling you to get your car at a lower interest rate.
What’s The Term Of Your Loan?
It’s natural to try and adjust your monthly payment against the loan term, i.e. make it a longer term for a lower monthly installment. But this is one of the biggest mistakes you can make since you’ll be paying out a lot more in interest. So, the best option is to opt for a term of three to four years. This is especially sensible since the value of your car (be it old or new) will depreciate considerably by the time it’s four or five years old.
Weigh your options and choose a payment option that suits you the best before finalizing the purchase of your car.