7 Key Signs That Your Monthly Car Payment Will Break Your Budget
Written by
Martin Dasko
Edited by
Amber Barkley
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
If you’re looking for a new vehicle, you’ve likely reviewed all your options after shopping around. You’re finally ready to get into that new car, but there’s just one thing stopping you: the car payments. As exciting as it is to get into a new car, you have to ensure that your finances can handle this decision. Adding a car payment to your monthly budget can hurt your financial situation if you don’t have the space for it.
Here are seven signs that the monthly payment on a car will be too much.
You Don’t Have Much Money Left Over
“One sign that a monthly car payment will break your budget is that when you calculate the car payment, potential gas use and insurance, these things add up to more than you have left in disposable income,” said Sebastian Jania.
You don’t want to put yourself into a position where you don’t have any flexibility, because you never know what challenges life will present. If you don’t have much money left over after your driving expenses, you could struggle with covering other necessities, like rent or groceries.
The Down Payment Cuts Into Your Emergency Savings
If you have to dip into your emergency fund to make the downpayment on your vehicle, you may not be ready for this purchase.
The goal of an emergency fund is to help you handle the unexpected expenses that can pop up. One of the most common unexpected expenses is vehicle repairs. If you don’t have the money left in your emergency fund, you could have to rely on credit cards.
You Have To Cut Back in Other Areas
“Another sign that a monthly car payment will break your budget is that in order to get the vehicle, you have to sacrifice other areas of your life,” said Jania. “If you’re having to cut down other things to justify the car payment, it’s likely that it is too high and is out of your budget.”
A car should help you get around and simplify your life. It may not be worth it if you find that the vehicle would force you to cut back in other areas. You don’t want to be limited in how much you can spend on groceries and other essentials because of your car payment.
Loan Payments Exceed 15% of Your Monthly Income
While developing a perfect formula is difficult, many experts suggest that your car loan payments shouldn’t exceed 15% of your monthly take-home pay. You also have to factor in the other driving costs, like insurance, fuel and parking. These expenses can add up quickly. This could put you in a tight financial position, and you wouldn’t be able to focus on other financial goals.
The Loan Terms Are Too Long
You can’t afford this vehicle if the loan terms are more than 60 months. You’ll spend more on interest than you should and have payments for an uncomfortable amount of time. If you’re unable to make space for a monthly car payment that will let you pay it off in less than 60 months, you’re not ready.
The lengthy loan term would also impact your monthly budget for many years to come. You could regret this decision in a few years, when you’re ready to focus on another money-related goal.
You Have Other Debt
If you have credit card debt or any other debt you haven’t paid off, you may want to prioritize this until you have more room in your budget. When you add another debt payment, a decent amount of your monthly income will go towards loans instead of your retirement or other financial goals.
With interest rates higher than normal, you could spend much more on financing, as well.
You Don’t Have a Steady Income
“Another sign that a monthly car payment will break your bank is that you’re not in a position to make the payment if your income is temporarily reduced or an unexpected emergency expense comes up,” Jania said.
If your income isn’t stable, you shouldn’t add a hefty car payment to your monthly budget. You don’t want to rely on credit cards to get through the lean months. As you focus on stabilizing your income, you could use this time to beef up your emergency fund and save more for the car down payment.
Closing Thoughts
Before you finance a vehicle, it’s essential that your monthly budget can handle it. While a car may be essential to your life, you don’t want to be stuck with payments that could destroy your budget. This is why it’s so important to pay down debt, beef up your emergency fund and get your finances in order before making a major money decision.
More From GOBankingRates
