There’s a lot of people who want a vehicle and don’t even think of the term “auto loan” amongst their options.
They either don’t have any means of paying back a loan, or their credit score is in shreds so they don’t even consider it.
Whatever your scenario, we advise that you evaluate yourself and determine the amount of monthly payment you can afford to take on. Until that’s done, keep all your options on the table! The thing is, it is a smart move to spend 10% or less of your earnings on a car purchase. This helps keep your total car expenses between 15% to 20% of your monthly earnings.
Right now, you‘re feeling you can only afford a beat-up buggy if you follow this 10% payment advice. But there is a fascinating twist to this… It’s called the balanced-budget approach. Look at how it works:
Balance your car payment, budget – and life too
50-30-20 rule is a rule recommended by NerdWallet. It is an act of sharing your take-home income into three major expense categories:
- Needs such as food, accommodation, and transport may take 50% – in this case, this is your auto loan payments and expenses related to your car.
- Wants such as travels, entertainment, and other non-vital stuff may take 30% off your earnings.
- Using 20% to meet long-term financial objectives, savings, and paying off credit cards.
The “needs” section definitely contains your car loan payment. For most people, a car is a lifeline for quick and comfortable transportation for tasks such as going to work on time, taking kids to school, amongst other things.
However, we can’t ignore the flexibility offered in the approach of the balanced budget. If the car of your choice is quite expensive, placing it in the “wants” category won’t be bad at all, provided the budget is totally balanced.
Therefore, while budgeting 10% for your car loan payment may look constrictive, if you consider economizing in other areas of your budget, then you might be able to spend more of your monthly income on your car.
Your car expense is not only your loan payment
While many people may think their car loan is the only expense they are to make on their car, understand that there are other expenses that are auto-related. Insurance, maintenance, toll fees, repairs, and even parking charges.
Many financial specialists recommend limiting your total auto expenses below 20% of your total monthly income. Therefore, your car loan may take up to 10% of your income, 5% or a little more may be spent on other car-related costs.
For instance, if your monthly income is $3,000, your auto loan payment is supposed to be about $300. And $150 should be budgeted for other auto-related costs.
Expensive Car Payment – A mistake you should avoid
After determining the payment you can afford to pay every month, pay attention to how your loan payments are calculated. These include the following:
- The loan sum
- The Annual Percentage Rate (APR). This involves the interest rate too.
- The duration of the loan payment.
A lot of money could be wasted if you focus on the monthly payment alone while ignoring your total funding expenses.
Ignoring your total funding expenses when choosing your monthly auto loan payment can be financially devastating…
Credit score and other factors determine the interest rate you get on your car loan. Low credit scores breed higher interest rates on loans. It is vital to compare and find the best rate on your car loan especially if you have a bad credit rating.
In addition, many people prefer paying a loan over a longer term than normal because they feel it offers them a more comfortable car payment deal, but they don’t understand they end up paying more in interest over the loan term than they should if the term was quite shorter. Paying for a used car should be termed as close to 36 months or less that you can afford. While those vehicles closer to new model years are generally eligible for 60 or 72-month terms, again the shorter the term, the better.
Stay balanced – while getting what you want
Now that you have learned and understood what it implies to get affordable loan payments that suits your budget, you will be better armed to land the best car deal around.
Most financial specialists will recommend economizing and living within your means, but we will say; if getting the ride of your dreams is important to you, go for it – make your dream a reality – provided the sum of the budget stays balanced.
