High Car Payments Can Drive You Over The Edge

By Author: Rama Charan
Total Articles: 10
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Many people in debt counseling can trace the beginning of their debt problems to a new car purchase—too much car, big monthly payment, and financed too long. Some households even have two vehicles with large payments in the $400 to $500 range. But I got a really great deal is typically the line of thinking. With the budget maxed out, one can see how this burden can inevitably lead to a financial crisis. It's easy to start falling behind when you don't have the money for car repairs and the car isn't paid off yet.
How much car can you afford?
You may think you got a great deal on the new SUV parked in the driveway. After all, the dealer took two thousand off the sticker price because of the points you accumulated on your credit card. You wanted it because you want to impress your neighbors, or even yourself. The best deal is one that you can actually afford and one that suits your needs. Several factors have to be looked at in order to make a smart purchase:
1. Monthly payment—financial experts recommend spending no more than 15% of your monthly take-home pay for a car payment. If your ...
... budget is tight, a more conservative number like 8% is more appropriate.
2. Term of the loan—according to the Federal Reserve, the average auto loan term has been creeping up over the years. In 1998, the typical car loan was a 4-year term, and now, lenders offer up to 6-year terms. It certainly lowers your monthly payment and may help you reach the 8% goal, however, it doesn't come without cost. Obviously, you'll pay a lot more for the car because of interest, but if you want or need to sell, chances are you owe more than what the car is worth. It takes a lot longer to build equity if you have a long-term loan. It's better to figure out what you can afford based on a three or four year loan at the most, or consider buying a used car for cash.
3. Interest rate—shop around for the best rate before negotiating with the dealer. If the dealer offers incentives, such as a 0 percent loan or cash back, do the math and base your decision on the outcome.
4. Your own budget—how much debt do you already have and will you be able to afford the cost of ownership, taking into account insurance, gas, and maintenance? If you already have a car loan, don't be tempted to roll the debt over into the new loan. This will really create more problems, especially if the car is totaled or stolen.
What you can do
To make wiser decisions regarding your vehicle purchases, evaluate your needs, rather than your wants. Most people do indeed need a car for transportation, but a new car is really a luxury. Seeing your car as a status symbol also contributes to over-buying. Lastly, just because the lender approved a larger loan doesn't mean it's good for your budget.
About Christian Credit One, Inc.
Christian Credit One, Inc. is a national, non-profit Christian Credit Counseling organization dedicated to helping consumers achieve financial wellness through Christian credit counseling and education. Established in 1994, Christian Credit One has helped over two million individuals achieve financial security. Christian Credit One is one of the top members of the American Association of Debt Management Organizations (AADMO), Christian Credit One manages clients across the country. Personalized and confidential consultations are available in person, by phone or online. Visit Christian Credit One or call 888-767-9155.

Greg McTaggart, Certified Credit Counselor with 22 years experience, licensed by AFCPE, Director of Christian Credit One and is an expert in budget and Christian credit counseling Having the combined experience as a licensed Real-estate salesman, Mortgage Broker, Real-estate Broker, Notary, Ace Member of the Cincinnati Credit Executives, Mortgage Assistance Counselor and Spokesperson of the radio talk show The Money Mentor, Greg McTaggart is a qualified Christian Credit Counselor to help you.