When Is A Car Payment Too High? Johnson City Toyota

When Is A Car Payment Too High?

Cars are a necessity for Americans today. With car loans, home loans, mortgages, education loans, and other loans available, research shows that folks place the highest importance on making their car payments on time first. If a car payment was too high, you may try and make your car payment first and then have to default on all your other payments. This can be avoided by understanding a few fundamental principles about how loans work.

The EMI You Pay is Dependent on the Amount You Borrow:

If you intend to trade in your old car for a new one, you probably haven’t thought about putting down any extra amount for a down payment. However, experts recommend that you do dip into savings to make your down payment a better amount. If your trade in is worth $10,000, and you can add $4,000, your down payment will be $14,000 instead of just $10,000. If you plan to purchase a $30,000 vehicle, your total payment will be reduced to only $16,000, which makes a massive difference in your monthly payments and interest rates.

Basing EMI on your Income:

Many experts believe in budgeting your income into categories like necessities (food, housing, clothing, and transport – including your car payment), wants (entertainment and leisure), and savings (long term investments, planning for retirement, dream goals). Ideally, your car payment should cost you no more than 20% of your income. This includes your fuel, insurance, and maintenance expenses. It may seem too small an amount, but if it’s important to you, exchange a few items from your wants list with your car payment until your car is fully paid off. It helps to keep your car payment amount in the green.

The Term of the Loan:

As you increase the term of the loan, you’ll find that the monthly payment gets lower and lower. Don’t let this fool you! Take a closer look and you’ll see that as the term increases, you’ll also be paying a more significant amount on the total interest. The ideal term for a car loan should be about three years. However, if you feel that the monthly payment is higher than you can manage, you could set your term to four years. Beyond four years, you’ll find yourself paying for a car that’s already depreciated an average of 50-60% of its original value. If you decide to trade in your vehicle for the next latest model, you may not get a good amount.

Base your decision on the interest rate available at different loan providers also, and you’ll be able to arrive at a comfortable amount to be paid monthly.