When you’re shopping for a new or pre-owned vehicle and want to finance your purchase, you need to be diligent about taking out a loan. Different loans can provide the same amount of capital at different interest rates with different terms. For instance, two $15,000 loans could differ in the end by $2,000 or more.
Before taking out any type of car loan, including a personal loan to lease a car, it’s imperative to do two things: calculate your monthly payments and calculate the total cost of the loan. The total cost of the loan won’t be the same as the amount of money you’re given by your lender. Your total loan cost will include interest, fees, and often penalties for late payments and early repayment.
Car loans aren’t as simple as they seem and the larger your loan, the more unexpected debt you might incur. To avoid unexpected debt, here are 5 reasons to keep your car loan under $30,000.
- You don’t need to pay $600+ per month on a car payment
There is no reason you need to pay $600 or more per month just to drive a car. In some areas of the world, $600 is the cost of rent plus utilities.
If you have truly disposable income in the amount of $600 per month or more, and spending it on a car payment won’t make a dent in your finances, then you can afford an expensive car loan. However, if you need to rearrange your life and take on a second or third job to meet a $600 monthly car payment, you can’t afford your loan.
A $30,000 car loan is likely to bring your car payments between $400-$500 per month depending on the terms of your agreement. Of course, financing a cheaper, used car for $15,000 means you’ll pay far less in interest and you can still get a decent car for that amount.
- Millions of people can’t afford their car loan payments
If you’re one of millions of Americans who can’t afford to pay back a big car loan, you’re not alone. According to data compiled by Consumer Reports, more than 7 million Americans were at least 90 days behind on car loan payments at the end of 2018. Those loans averaged $31,000.
Delinquent car loans have reached an all-time high. If you’re not absolutely sure you can repay a big car loan plus interest and fees, finance a cheaper car you’re certain you can afford.
- Qualifying for a loan doesn’t mean you should take that loan
Lenders might offer you a big loan with a high interest rate and/or fees hoping you’ll take it because you want the car of your dreams. Just because you’re offered a loan doesn’t mean you can actually afford that loan.
Think about the future. If your car loan is going to last 72 months, do you have any plans to incur additional debt in the next six years? Do you plan on going to college, buying furniture, or buying a home? If you can afford a big car payment today, consider the future before signing on the dotted line.
- A high car payment could disqualify you from a mortgage loan
If you’re planning on buying a home, having a high car payment could prevent you from qualifying for a mortgage. A high car payment can make your debt-to-income ratio too high for the banks to approve your application.
- Expensive cars have high insurance and registration costs
Insurance policies for new cars tend to be much higher than for used cars. Even if you can afford your car payments, can you afford the insurance? In some states, certain cars can cost $800 per year in registration fees. Know all of the expenses you’ll acquire before taking out a car loan.
A car loan is debt – be responsible
Remember that a car loan is debt. If you can afford high car loan payments, you should have no problem keeping up with payments and managing your debt. However, if you’re already in debt, struggling to pay your bills, or working too much just to survive, a big car loan is the last thing you need.
Although advertisements may have convinced you that you need to drive a brand new car, it’s not the truth. The moment you drive a new car off the lot, the value plummets dramatically. You could buy the exact same car from a used car lot and pay significantly less. Or, you can buy an older, pre-owned vehicle several models behind the newest model and still feel fantastic driving around town.