When it's time to purchase a new car, what's one of the first stuff you consider? How large your car payment will be, of course—and how to ensure that it stays to a minimum. After all, every dollar spent on the car payment each month is one less dollar you can put toward savings, debt payments or fun stuff (like eating out, buying new clothing or traveling).
Choosing the best car payment is determined by several factors, including your monthly income and expenses, your present debt level, and the specific car you are interested in. But the size of your car payment is just one issue to think about when you go shopping for a car. Here's what else you need to factor in to the equation for the greatest deal.
Figure Out How Much You Can Afford
Start by assessing your monthly income and expenses. It's especially important to think about your debt payments, for example mortgage payments, student loan payments and credit card payments. Lenders will look at the ratio of the total monthly debt obligations to your total monthly income when deciding whether or not to approve you to have an auto loan. Ideally, your financial troubles should be below 40% of the monthly income. Learn to calculate your debt-to-income ratio.
If your debt-to-income ratio is within very good condition, measure the remainder of your monthly expenses to determine how much you can invest in your vehicle. As well as the car payment itself, make sure to consider the other expenses of having a car, for example insurance, repairs and gas. Generally, your monthly car expenses shouldn't exceed 20% of the monthly net pay.
If you need to release more money for a car payment, think of methods to reduce both fixed expenses (much like your utilities and rent) and variable expenses (like groceries or online subscriptions). Get more tips about how to make a budget to understand in which you might reduce to help fund your vehicle payment.
Look in the Auto Loan, Not the vehicle Payment
The cheapest car payment is not always the best choice. Why? Deciding on the lowest car payment could mean you end up paying more for your car over time. To lower your car payment, you typically have to stretch out the length of your loan. Over time, that means paying more interest.
Suppose you want to buy a $20,000 car and also have a $2,000 deposit, so you're financing $18,000. A 48-month (four-year) loan at 5.09% interest may have monthly obligations of $415. The interest about this loan can cost you $1,933 over four years.
What if you wish to reduce your car payments? Stretching exactly the same loan out to 60 months (5 years) lowers your monthly payment to $340. However, over time, you'll pay $2,425 in interest. Extend the borrowed funds to 72 months (six years) and your payment per month drops to $291—however your total interest paid rises to $2,926.
Instead of comparing the different car payments you will get, compare different loan offers. Do that before you decide to ever head to the dealership. You can look up current average interest rates on auto loans online. A great technique is to obtain preapproved for an auto loan so you understand what loan terms you will get from a bank—then obtain that preapproval along with you when you consider the dealer's offers.
When comparing loans, consider the amount you borrow, the size of the borrowed funds and the apr (APR) to assess the ultimate cost. The APR represents the interest rate around the loan as well as any fees involved; compare APRs for loans of the same amount and duration to look for the cheapest price.
Other Methods for getting Low Monthly Car Payments
There are plenty of options to decrease your monthly car payments making your car less expensive.
- Improve your credit score. A greater credit rating qualifies you for better loans. If your credit score is just fair or poor, wait a bit to purchase your car until you've improved it. Learn how to improve your credit score.
- Save for a bigger down payment. The greater you can afford to put toward a payment in advance, the low your monthly car payments will be. A bigger deposit also cuts down on the loan amount you'll need, assisting to keep your overall debt manageable.
- Lease the car. If you're craving a new car but can't afford the monthly payments to buy one, leasing generally offers lower monthly obligations for the similar type of vehicle. Just make sure you understand all of the costs involved, as well as restrictions for example mileage limitations, and remember that you won't own the car once the lease is up. Learn more about leasing an automobile to determine if it's best for you.
- Look for any more affordable or used car. Today's late-model used cars offer most of the same extras and features as brand-new models at significantly lower prices. If you do not want to buy a second hand car, set your sights on the less expensive new car. You'll have lower monthly obligations but still reach savor that new-car smell.
To get the best possible auto loan, get a free credit report and appearance your credit score three to six months before you start shopping for a car in earnest. When you get to the casino dealer, the dealer may try to allow you to concentrate on cutting your monthly payment—often with a longer-term loan that costs more ultimately. Don't let them dissuade you. Concentrate on the total cost of the auto loan, not the monthly payment, to get the car you would like at a reasonable cost.