Here are some important points to consider when getting into car payments. So, When Is a Car Payment Too High? According to experts, a car payment is too high if the car payment is more than 30% of your total income. Remember, the car payment isn't your only car expense!
Longer terms mean more interest paid over time, bumping up those monthly payments. Increased Car Prices: New cars are just getting pricier, thanks to things like tech advancements and inflation. So, even if you're borrowing less in relative terms, the overall cost of the car can still make those payments higher.
So essentially yes $500 a month car payments is perfectly normal.
NerdWallet recommends spending no more than 10% of your take-home pay on your monthly auto loan payment. So if your after-tax pay each month is $3,000, you could afford a $300 car payment. Check if you can really afford the payment by depositing that amount into a savings account for a few months.
Renegotiating your loan terms, refinancing or making extra payments can help lower your car payment. You can also sell your current car and buy one with a more budget-friendly payment but watch out for high interest rates. Before you buy, shop around and save for a large down payment to keep your car payment low.
The average monthly car payment is $737 for new cars and $520 for used. Several factors determine your payment.
Set your car payment budget
50% for needs such as housing, food and transportation — which, in this case, is your monthly car payment and related auto expenses. 30% for wants such as entertainment, travel and other nonessential items. 20% for savings, paying off credit cards and meeting long-range financial goals.
Your monthly auto loan payments should not exceed 10 to 15 percent of your pre-tax take-home salary. Due to increased vehicle incentives, drivers may find relief when shopping for a vehicle this year. To secure the best deal, work to improve your credit score and consider making a sizeable down payment.
Your credit score can have a major impact on your monthly car payment because it affects financing.
It's total loan amount (including interest) divided by the loan term (number of months you have to repay the loan. For example, the total interest for a $30,000, 60-month loan at 7% would be $6,497.40. So the monthly payment would be $608.29 ($30,000 + $6,497.40 ÷ 60 = $552.50).
Because of the high interest rates and risk of going upside down, most experts agree that a 72-month loan isn't an ideal choice. Experts recommend that borrowers take out a shorter loan. And for an optimal interest rate, a loan term fewer than 60 months is a better way to go.
For large luxury models, $1,000-plus payments are the norm. Even a handful of buyers with subcompact cars have four-figure payments, likely due to having shorter loan terms, poor credit, and still owing money on previous car loans, according to Edmunds analysts.
A person making $60,000 per year can afford about a $40,000 car based on calculating 15% of their monthly take-home pay and a 20% down payment on the car of $7,900. However, every person's finances are different and you might find that a car payment of approximately $600 per month is not affordable for you.
You can comfortably afford a car that is roughly half of your salary, maybe even a little more if you have little other debt. So at 120k you can afford a car up to 60–70k. Honestly depends on your other expenses. If you live way below your means on everything else, you may even be able to afford a 100k car.
“A widely accepted rule is that your car payment should not exceed 15% of your monthly take-home pay,” said Jeff Rose, a certified financial planner and founder of Good Financial Cents.
It depends on how much income you have after your bills and expenses. But as a rule of thumb, your car payment should not exceed 15% of your post-tax monthly pay. For example, if after taxes, you make the U.S. median income of $37,773, you could shop for a car that costs up to $472 per month.
If you keep missing payments, your lender will warn you that you are not adhering to the loan terms and may threaten to repossess your vehicle. Once you are 30 to 90 days late on your repayments, your lender will likely say that your loan is in default.
Refinance your car
Refinancing your car loan is one of the most common ways to secure a lower monthly payment. If your credit score has improved since you took out the original loan, you may be able to qualify for lower rates and save money on interest.
In some instances, a dealer may accept the return of a financed vehicle if it's necessary to avoid repossession. What's important to keep in mind here is that a vehicle's value depreciates quickly. Even after just a few months of ownership, you may owe more on the car than it's currently worth.
Your interest rate is too high: Higher interest rates can make it a struggle to pay down your auto loan. As noted above, if your credit score has improved since you first took out your car loan, or if market rates have dropped, consider refinancing your loan.