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How Much Car Payment Is Too Much?

Finance | 08/25/2022 22:00

Monthly expenses never seem to stop. Between our rents and mortgages, insurance, utilities, and living expenses, the bills sometimes just keep rolling in. And buying a car just keeps those numbers ticking upwards. Car payments, gas, insurance, repairs–all of these can add stress on our monthly budget. But how do you know when too much is too much? How can you decide when a car is officially out of your budget?

Here’s how you can decide how much car payment is too much.

What car payment can you afford?

When shopping for a car, it’s important to know exactly how much money you can afford to spend every month on car payments. The general rule is to spend less than 10-15% of your monthly income on your car payments. When including gas and insurance, this number shouldn’t be more than 20% of your monthly income.

If your take home monthly income is $5,000, 10% of your monthly income is $500. This gives you an additional $650 for gas and insurance. But instead of merely following some financial rule, you will want to ensure that this number actually fits into your budget and actually makes sense for your lifestyle.

In order to determine if this number works you will need to consider your budget as a whole. You can calculate your budget using the following steps:

  1. Determine your income. This number should be your take home pay–your pay minus any taxes and contributions. Be sure to include any additional sources of income outside of your salary as well.

  2. Determine your expenses. Include your invariable expenses (numbers that do not change every month like your rent and insurance premiums) as well as variable expenses (numbers that do change every month like your grocery bills and electricity).

  3. Make a plan. Decide what your priorities are. Are you looking to save money for the long term? Looking to get out of debt? There are a lot of different budgeting models to choose from that can help you structure your budget. A 50/30/20 model is a common approach, where 50% of your income goes to needs, 30% goes to wants, and 20% goes towards savings.

  4. See how your expenses and your income fit into your budget model. Go through each item and see how they fit into your budgeting goals. This will also allow you to see how much money you can afford to pay for your new car.

Does the 10-15% rule work for you? Does it still allow you to allocate money towards savings or paying down debts? Be sure you know what payments you can afford before stepping foot into a car dealership. And remember that it’s always better to stay under budget than to go over.

How can you negotiate a car payment?

Once you know what monthly payments you can afford, you can start to decide what cars are available to you. You can look online to determine how expensive certain cars are, and use an online calculator to determine the monthly payments.

Ultimately the monthly payments you are responsible for will depend on a few factors:

  • The total cost of the car

  • The car loan APR you are offered

  • The down payment you make

You have the power to negotiate the total cost of the car. Dealers always have wiggle room in their pricing, so depending on the popularity of your car you might have luck negotiating a price that is below MSRP. You can also try to negotiate out of any associated fees, which would be added onto your repayment amount. Fees such as “advertising fees” and “dealership fees” can have some wiggle room to negotiate.

The car loan APR you were offered will be based on your credit score, debt-to-income ratio, and overall financial health. The better shape your credit score is in before you apply for financing, the better car loan APR you will be offered.

The down payment you make will also greatly affect the amount of your monthly payments. The more of a down payment you make on your car, the less of an overall principle you will owe and the less your payments will be. Experts generally recommend putting down at least 20%–this can also help ensure that you don’t end up owing more money than your car is worth.

How can you reduce your car payments every month?

If you have already taken out a car loan, you may be wondering how to get low monthly car payments. Your best bet to reduce your car payments is to refinance your car loan. By refinancing your loan, you can reduce your payments in a few ways.

Refinancing to a lower car loan APR can save a lot of money in interest. You will have the best chance refinancing to a lower APR if:

  • Your credit score has increased

  • Your debt-to-income ratio has decreased

  • The prevailing market rates have decreased

Any of these can lower your car loan APR significantly which can in turn lower your monthly car payments significantly. While you don’t have control over the market rates, you do have the power to work on your credit score and pay down your debts, so be sure to focus on that before you apply for refinance.

Refinancing also gives you the chance to change your car loan repayment period. When you lengthen your repayment period, you stretch out the principle you owe over a longer period of time which automatically lowers your monthly payments. It is worth noting however that you will end up paying back more in the long run as you will be paying interest over a longer period of time.

That’s how you can decide if a car payment is too much and how you can lower your monthly payments.

It's important to make sure you can afford your monthly car payments before you sign on the dotted line. Doing your research ahead of time can help set you up for success. But if your car payments have become a monthly burden for you, refinancing your car loan may help you out of a tight spot.

Refinancing a vehicle with Auto Approve is simple and easy. After all, refinancing is our specialty so we know a thing or two about it. We have relationships with lenders across the country so you can rest assured you are getting the most competitive rates possible. All you have to do is get started with a free quote to see just how much money you could be saving. We handle the rest–even the DMV paperwork! So don’t wait any longer and don’t waste any more money, get your free quote today!


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
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