Car Finance – How Much Can You Really Afford

Posted by: Derrick    Tags:  , ,    |  No comment

Financing a car can be a very complicated thing to do. If you plan ahead and make smart decisions, you can avoid paying a lot of interest and obtain lower car payments. Try some of the following suggestions:

Look Into The Future

The car payment that you can afford needs to be the car payment that you can afford several years from now. Car loans typically last 4-5 years, and some last even longer. The first thing you should reflect upon is the stability of your family income. If you have a stable job and don’t anticipate a reduction of salary, then you are better able to handle the payment in the long-term. However, if you have a variable mortgage or an upcoming student loan payment or you may need to make a second car payment soon, then these factors need to be considered now. It is also good to consider future reductions in your payments. You could find yourself struggling to make a car payment now, but not in 6 months.

Your Payment And Your Income

I have always heard from mortgage brokers that your mortgage and car payment should never exceed 40-50% of your income. Considering that you will have a mortgage that is usually 25-35% of your income, make sure that your car payment is no more than about 15-20% of your income. A lower percentage would be even better.

Get The Lowest Payment Possible, Then Pay A Little More

I have always gotten the lowest payment possible on my car loan. This can be done by a combination of getting a lower interest rate or extending the payments as much as possible. Then, if you are ever in a financial pinch, your low car payment will be more manageable. If you experience good financial fortune, then you can always accelerate your car payment and pay it in full earlier to avoid the excess interest charges that accrue as a result of your extended loan. Paying a small extra amount in addition to your original loan payment can drastically reduce the length of the loan.

Have A Sizeable Down-Payment

Put a 10-20% down-payment on your purchase. Doing so could lower your interest rate, lower your payments and avoid things like having to purchase gap insurance. Drive your older car a few more months to give yourself a chance to save up for your down-payment. It will be worth the effort.

Consider a Used Car or Certified Pre-Owned

You can get a really great deal on a used car or a certified pre-owned car. Both can come with great warrantees and relatively low mileage. The difference is the thousands of dollars that you save on your used car purchase. A new car depreciates about 20% as soon as you put any mileage on it. Avoid paying for that depreciation by buying it used. This can lower your payments and/or lower your down-payment.