Many people turn to a car loan when it is time to purchase a vehicle. And while a car loan can be a big help to these buyers, there are situations where a loan can put your financial health at risk.
So, if you want to eliminate some financial stress , keep an eye out for these signs that a monthly payment might be too much for your budget.
Make Money: 8 things to do if you're barely scraping by financially
Your payments top 15% of your monthly income
It’s important to determine how big your monthly payment is as a percentage of your income.
Many experts recommend that you spend no more than 15% of your monthly income on a car. If you're looking at a payment that exceeds that percentage, you might be better off selling your car and getting something cheaper.
Or, you might want to try to make cash on the side via a part-time job or a side hustle.
Own a car? Here's 7 warning signs you're paying too much for car insurance. You barely have any disposable income each month
Whatever the size of your car payment, it’s important to give yourself a buffer in your budget for unexpected expenses, or even just the occasional night out.
Make sure the car payment isn’t so big that it leaves you with no money at the end of the month.
Other debts are weighing on you
A big car payment can really cause you stress if you also have other debts to pay each month.
If you already have debt tied to a student loan, credit card, or mortgage, make sure your car payment is affordable enough that it doesn’t leave you drowning in debt.
Avoid these money mistakes: 9 dumbest things smart people waste money on
Your income fluctuates
Not everyone gets a steady paycheck. If you are self-employed or work in a field such as sales or real estate, it's possible that your income fluctuates each month.
If your income is not steady, make sure your car payment is low enough that you will still be able to cover it during less lucrative months.
Some fees are wrapped into the loan
Some car buyers wrap tax, title, and license fees into their loans. This might be convenient, but it means you are likely paying interest on those fees, which just boosts the size of your car payment.
If at all possible, try to avoid doing this.
The loan term is too long
Longer loan terms are becoming more popular. They help buyers who might want a lower monthly payment or who don’t have enough cash for a large down payment.
However, over time, loans with longer terms can end up costing you more in interest expense.
Get Out of Debt for Good: Try these 6 clever ways to crush your debt You rolled over your previous loan
If you have negative equity on your current car loan, a dealer might suggest you roll your current loan into a new loan so you can purchase a car.
However, this simply increases the negative equity in the vehicle and adds to both your interest costs and the size of your monthly payment. So, think twice about taking the dealership up on its offer.
You depleted your emergency savings
It’s important to have an emergency fund to cover unexpected costs. Among other expenses, your emergency fund could come in handy if you damage your car in an accident or need an unexpected repair.
It’s recommended that you should have an emergency fund equivalent to about three to six months of living expenses. Any big-ticket item like a car loan that cuts into your ability to keep money in this fund may be a sign that you’re paying too much for your car.
Bottom line
It’s a good idea to create an estimated car budget when you shop for a new car that can help you keep your loan cost in check.
Remember to factor in the regular costs of owning a car, such as gas, maintenance, and potential repair costs. It’s also important to shop around for the best car insurance to help you save money.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
Local News
