How Much of My Income Can I Spend on Car Payments?
- When you finance a new vehicle, you'll be signing up for a monthly payment schedule that the dealer will outline in the purchase agreement. Car payments use fixed interest rates, which means your payment will remain steady for the life of the loan. All of your up-front costs, including the initial registration or licensing fee, state and federal sales taxes and miscellaneous dealer fees, will become part of your loan.
- Determining your car payment isn't as simple as dividing the cost of a new car by the number of months you plan to finance it for. When you make a down payment the dealer will deduct that amount from the price that you finance, which also means you won't be paying interest on it. However, interest on the remaining cost of the car can add up.
The true cost to own a car also includes maintenance and repairs, fuel, licensing fees and the cost of insurance over the life of the vehicle. These costs can be unpredictable, making it impossible to know just how much money to set aside. This means that a car you can barely afford can easily become one you can't afford. - A car payment may be among your largest monthly bills, but don't forget to add up the other costs you have each month. The old axiom that a mortgage payment or rent should cost one-third of your take-home pay means the money available to make a car payment is already cut down significantly. Utility bills, child care costs, loan payments and contributions to savings all reduce how much you can afford. Make some notes and balance a complete, inclusive personal budget before committing to a car payment.
- Financing a car can be a smart financial move. At the end of the loan, you'll own the vehicle outright. This means you can sell it or trade it in when you buy a new vehicle. It also means you'll be able to drive without making a car payment for as long as the vehicle stays safe and reliable.
Auto financing can have negative consequences if you overextend yourself. The bank that makes the loan uses your vehicle as security, and can repossess the car if you fail to make payments on time. Missed payments can also harm your credit score and appear on your credit report, making it harder for you to borrow money in the future. - Purchasing and financing a car is only one way to get a vehicle. Leasing, which requires you to make a monthly payment, but also to turn the car back over to the dealer at the end of three years, is an option for drivers who want the security of a newer vehicle or lack the funds for a down payment. Saving to buy a new or used car without a loan means you'll be able to avoid paying interest and you'll be free to sell the car whenever you want to.
