12 Things You Must Do When Your Car Payment Takes Up Over 20% of Your Paycheck
Written by
Sean Fisher, AI Editor
Edited by
Sean Fisher
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Finding yourself with a car payment that eats up more than 20% of your paycheck can be financially overwhelming. According to experts, it’s recommended to spend around 10% to 15% of your paycheck on car payments, and absolutely no more than 20%.
Average car payments in the U.S. increased year over year, with new vehicles up 2.5%, leased vehicles up 2.4%, and used vehicles up 0.4%, resulting in average monthly payments of $738, $606, and $532, respectively, according to Experian. Americans owe $1.607 trillion in auto loan debt, the second-largest debt category, and took out an average of $55 billion in new auto loans each month in Q4 2023, with younger borrowers (under 50) accounting for $33.3 billion of that. Auto loan delinquency rates rose, with 4.2% of auto debt at least 90 days late in Q4 2023, an 11.8% increase from the previous year.
Managing high vehicle expenses requires strategic adjustments to your budget and lifestyle to prevent long-term financial strain. Here are 12 essential steps to take if your car payment is consuming too much of your income:.
1. Reevaluate Your Budget
Assess Your Finances: Begin by taking a detailed look at your monthly budget. Identify all sources of income and list out all your expenses. Understanding where your money is going can help you find areas to cut back.
Prioritize Expenses: Allocate funds to essential expenses like housing, utilities, and groceries first. Determine if there are any discretionary spending habits you can reduce or eliminate.
2. Refinance Your Car Loan
Shop for Better Rates: Refinancing your car loan could lower your monthly payment by securing a lower interest rate or extending the loan term. Compare offers from multiple lenders to find the best deal. According to MarketWatch, it’s crucial to compare the best auto loan rates and refinance rates to ensure you’re getting the most favorable terms.
Consider a Longer Term: While extending the loan term can lower monthly payments, be aware that it may increase the total amount of interest paid over the life of the loan.
3. Make Extra Payments
Reduce Principal Faster: If possible, make extra payments toward the principal balance of your loan. This can help reduce the overall interest you pay and shorten the loan term.
Allocate Windfalls: Use bonuses, tax refunds, or any unexpected cash inflows to make additional payments on your car loan.
4. Adjust Your Insurance Coverage
Compare Insurance Quotes: Shop around for car insurance to see if you can get a lower premium. Different insurers offer varying rates, and you might find a more affordable option.
Consider Coverage Levels: Review your current insurance coverage. If you have more coverage than necessary, consider adjusting it to lower your premium. However, ensure you maintain adequate protection.
5. Explore Side Gigs
Increase Income: Look for ways to boost your income through side gigs or freelance work. Platforms like Uber, DoorDash, or freelance websites can provide additional earnings to help cover your car payment.
Utilize Skills: Consider leveraging your skills for extra income. Tutoring, consulting, or offering specialized services can be lucrative side hustles.
6. Cut Non-Essential Subscriptions
Evaluate Subscriptions: Review all your subscriptions and memberships. Cancel or pause any that are not essential to free up extra cash each month.
Entertainment and Extras: Consider reducing expenses on entertainment, dining out, and other non-essential activities until your financial situation improves.
7. Create a Debt Repayment Plan
Organize Debts: List all your debts and prioritize them based on interest rates and balances. Focus on paying off high-interest debts first.
Snowball or Avalanche Method: Choose a debt repayment strategy that works for you, such as the snowball method (paying off small debts first) or the avalanche method (tackling high-interest debts first).
8. Use a Car Loan Calculator
Estimate Payments: Use a car loan calculator to understand how different payment amounts, interest rates, and loan terms affect your monthly payment. This can help you make informed decisions about refinancing or extra payments.
Plan Future Purchases: If you anticipate buying another vehicle in the future, use the calculator to ensure you stay within budget.
9. Downsize Your Vehicle
Consider Selling: If your vehicle is a luxury model or has high monthly payments, consider selling it and purchasing a more affordable car. A smaller, more economical vehicle can significantly reduce your monthly expenses.
Lease or Buy Used: Leasing a vehicle or buying a used car can be more cost-effective options. Ensure that the monthly payments fit comfortably within your budget.
10. Negotiate with Your Lender
Seek Temporary Relief: If you’re struggling to make payments, contact your lender to discuss your options. Some lenders may offer temporary relief, such as payment deferrals or modified payment plans.
Avoid Defaults: Communicating with your lender can prevent negative impacts on your credit score and avoid repossession of your vehicle.
11. Review Your Financial Goals
Reassess Priorities: Reflect on your long-term financial goals and adjust them as necessary. Prioritizing debt repayment and financial stability over discretionary spending can help improve your situation.
Set Realistic Targets: Establish short-term and long-term financial goals that align with your current income and expenses.
12. Seek Professional Advice
Consult a Financial Advisor: If you’re overwhelmed by your financial situation, consider seeking advice from a financial advisor. They can help you create a personalized plan to manage your debt and improve your financial health.
Utilize Resources: Many communities offer free or low-cost financial counseling services. Take advantage of these resources to gain insights and strategies for better financial management.
Conclusion
Managing a car payment that takes up over 20% of your paycheck requires proactive measures and strategic adjustments. By reevaluating your budget, exploring refinancing options, and making conscious spending decisions, you can alleviate financial stress and regain control over your finances. Remember, the goal is to balance your expenses in a way that supports both your immediate needs and long-term financial well-being.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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