How much is too much when it comes to vehicle loans?
Everyone loves that new car smell, right?
A brand new car or even a nice used car often comes with a steep price tag. More and more, our counselors are speaking with clients that are struggling with repaying an expensive auto loan. A mortgage, 2 car loans, student loans, and credit card debt can spell financial disaster. How much is too much though when it comes to an auto loan? After all, the dealer said you qualified for that loan amount. What are some of the “guidelines” when it comes to smart auto purchases?
*Do you need to buy brand new? Brand new vehicles often have loans that come with special lower interest rates to draw you in if you have good credit. If you have to extend the auto loan to 7 years though to make that amazing new vehicle affordable, does it really save you money? Purchasing an older model that you can pay off in 3-4 years may save you in the long run as well as keeping you from over-extending yourself.
*Do you really need all the bells and whistles? Of course, most people would like to have all the brand new gadgets. If you already have other debt, and you just need a reliable vehicle, then it may be best to forego the thousands of dollars for all the added luxuries.
*Are you already deeply in debt? It may be cheaper to just fix your old vehicle. Remember that your automotive budget shouldn’t take up more than 20% of your take home pay. That figure includes car payment, car insurance, gas, oil, maintenance, and that goes down if you have other revolving lines of debt.
*Will I always have an auto loan? Vehicles are expensive, but it is possible to pay cash for them or save up a hefty down payment. If you drive that paid off vehicle around for several years, take the funds that you would use to make the monthly payment and set that money aside each month. Before you know it, you will have a nice nest egg to put down on a vehicle or completely purchase it loan free.
*Do I have to finance at the dealership? Many dealers do offer various lending programs to finance auto purchases. If you know you have excellent credit though, it pays to shop around. Even if you have a lower FICO score, it doesn’t hurt to shop for a better rate. Inflated interest rates are a common predatory lending practice. Your personal bank or credit union may have a more favorable interest rate. Always read the financing contract to check for hidden fees.