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Strategies for Fitting a Car Payment Into Your Budget
What's your car payment threshold?
You know, the amount of money you just can't or won't exceed each month for a car payment? Researchers at CNW Marketing/Research in Bandon, Ore., say the threshold for most buyers is about $328 a month. Your personal threshold may be higher or lower. Maybe you have other priorities now and your threshold, even stretching your budget to the max, is more like $128 a month! Here are some ways to manage your monthly payment, and the impact each will have on your personal finances.
Down payment
Affects the size of a monthly payment and what you'd otherwise earn by saving or investing the money. Keep in mind, savings form part of your safety net against unknown future financial challenges, and help you reach personal goals such as continuing education or a special vacation. So just because you have money in savings doesn't mean you automatically should put it toward a down payment. Still, if you find car payments out of reach, perhaps saving more money for a down payment before you buy is your key to driving a car you can afford.
Longer loan term
Reduces your monthly payment, but you'll pay more overall for credit, a trade-off you may be happy to make. And, even with a longer loan, you always have the option of paying more any month you're able to. Just be sure you'll pay no prepayment penalty (dealers may impose this penalty; credit unions seldom do). And ask about the "rule of 78s." Lenders calculating loans this way make you pay more interest in the opening months of a loan, so if you pay off the loan later in the term but before maturity, you won't get much of a break on the financing expense.
Take the rebate
If available, and add it to any down payment you already have, plus the money you'll get by selling your car (use the retail value in your credit union's pricing guide) or by trading it in (use the wholesale value from the same guide). A higher down payment, no matter from what source or sources, reduces your monthly payment and your total finance expense. And remember, taking the rebate often makes more sense than accepting a dealer's low-rate financing: Usually, the low rates that most dealers advertise are for short-term loans. For example, one dealer offers 1.9% financing, but that's only available on two-year loans. A new $20,000 car with a $2,000 down payment (10% down) will require $18,000 financing. This translates to an astounding $765 monthly payment -- clearly out of reach for most buyers. If you choose this dealer's rebate plan, you forego the low-interest-rate loan but get a $1,500 cash rebate. Adding the rebate to your down payment can make credit union financing very attractive because the larger down payment reduces the amount you need to finance.
Purchase price
This is a price you negotiate, not the manufacturer's suggested retail price (MSRP). Use pricing guides available free at your credit union or public library, or online (for a fee), to determine a realistic starting place.
Combine tactics
Any one of these strategies will help reduce your borrowing expenses, but combining them really pays off. Use this calculator to compare your financing options.