When Is A Car Payment Too High?

When Is A Car Payment Too High?

There are thousands of Americans who end up defaulting on their car loans because they didn’t take the necessary precautions before signing up for the loan. Many were unaware of what it takes and some felt they had no choice but to take on the loan. The truth is, there’s always a choice when it comes to getting a car loan. So when is a car payment too high?

When You Pay More Than 30 Percent of Your Income On A Car Payment

Taking on a monthly payment of anything over 30 percent of your monthly income is too high. In case of emergencies such as job loss, illness or some other unexpected expense, your car payment could become secondary and you may have to default. This is never good for your credit score, so it’s best to keep things reasonable and ensure that you have money enough to tide you over for a few months by making a budget for every one of your expenses.

When the Term of Repayment Is Too Long

When the term of the loan is more than four years, you’ll be paying anything between $1,000 and $10,000 more than the price of the car just on interest. Furthermore, your car begins to depreciate the moment you drive it out of the showroom. Most cars depreciate between 50 to 70 percent of their sale price over time. So, keep your term as short as possible. Three years is ideal, but if you want to make the payments a little easier on yourself, you could opt for four years, but not longer than this.

When The Rate Of Interest Is Too High

The rate of interest charged on your car loan is entirely dependent on your credit score. If you have a score that’s over 650, you’ll have a better chance at getting an interest rate that’s in your favor. However, anything lower will result in a much higher annual percentage rate (APR). If your score gives you an interest rate of over 12 percent, it’s highly recommended that you consider improving your score first and then buying a new car. You could try an alternative such as getting a pre-owned vehicle or using public transport for a few months. You can improve your credit score by paying your bills on time and to the full and by making sure that you never miss a payment (other loans, credit cards, etc.).

Choice of Vehicle

It might be tempting to buy a car that’s out your price range based on its looks or brand, instead of opting for something more sensible. This should not be an option for you if you want to ensure that you don’t take on a payment that you can’t make in the future. Always choose the sensible option — lower price, better gas mileage and reliability. You can even consider a pre-owned car in good condition, since this will cost you much less and offer you practically the same service.

These are some of the ways that you can ensure that you don’t sign on for a car loan that’s too high to pay on a regular basis.