The Problem With Worrying Too Much About Your Car Payment

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - August 10, 2020

When you're getting a car loan and your main concern is your monthly payment, you’ve become a payment shopper. This can become problematic and lead to neglecting the other important aspects of your auto loan. We cover all the vital details to consider when you’re car shopping.

Car Payment Shoppers

Being a car payment shopper can create tunnel vision. This leads to not considering the larger parts of your auto loan, such as the length, interest rate, or even the price you're paying for the vehicle.

If you go to the dealership with the intention of having a car payment at a specific price point, they could do lots of things to make it happen. In fact, dealers often ask the question, “What monthly payment are you looking for?” instead of asking how much you want to spend on the vehicle overall.

Don't get us wrong, it’s fine to know the limits of your monthly budget, but you also have to consider the bigger picture when you’re financing a car. After all, vehicles are often the second largest purchases people make.

Long Auto Loans: A Short-Term Solution

A payment shopper may ignore the length of their loan just for the sake of having a lower monthly payment. A longer auto loan means more interest charges, which can lead to paying more for the vehicle than it's worth.

Since car loans are usually anywhere between 48 to 84 months (or four to seven years) long, it’s a long-term commitment to one vehicle, one interest rate, and one monthly car payment amount. If you’re considering having a long auto loan term just to lower the monthly payment, that vehicle may not be affordable for you right now.

Let’s paint a picture: say you tell the dealer that you want a monthly car payment under $300. You find a vehicle you like, but a loan term of 60 months puts you over the $300 limit. To fix this, the finance manager at the dealership could simply set you up with a longer loan term – problem solved, right? Wrong. Your initial problem of monthly cost may be solved, but you could run into even more problems long term.

What may not be getting discussed in this situation is how much more you’re going to pay in interest charges over the course of the loan. You may not even be told until the end of the transaction what your loan term’s length even is. Since a longer loan term does lower your monthly payment, it seems like a good solution at the moment because, technically, you can now “afford” the car each month.

Consider this well-known car buying rule: the 20/4/10 rule. It states that you should put down 20% of a vehicle's selling price; finance for no longer than four years; and spend no more than 10% of your monthly income on all car-related expenses (including your loan payments, insurance, gas, maintenance, etc.).

If your monthly payment is over 10% of your monthly income already, and you’re looking to stretch the loan to 72 months just to get to 10%, a cheaper vehicle is probably a smarter financial decision.

Price of Your Vehicle and Interest Charges

When you borrow credit to pay for large purchases, you get assigned an interest rate. For auto loans, the interest rate is normally fixed and almost always simple interest. This means that you’re charged daily on the balance of your loan. The more you borrow and the longer your loan, the more you’re going to pay in interest charges.

Your interest rate is largely based on your credit score, and the better your credit score, the lower the interest rate you tend to qualify for. If you’re a bad credit borrower, you’re more likely to qualify for higher interest rates, and possibly run into issues getting qualified for a loan at all.

Many bad credit borrowers opt to extend their loan terms to offset the month-to-month cost of higher interest rates, but it's not usually a wise move. You should opt to get into a reliable, manageable car that doesn’t require you to stretch your loan term for seven-plus years just to scrape by.

Shopping Without Car Payment Tunnel Vision

If you want to avoid falling into being a payment shopper, discuss the overall price of the vehicle you’re looking to buy with the dealer before anything else. Think about what your budget is, of course, but don’t max yourself out.

To help you get an idea of how much car you can realistically afford, start by doing some basic calculations that lenders use themselves: debt to income (DTI) ratio and payment to income (PTI) ratio. Auto lenders use these ratios to see how much income you have available each month, and how large of a monthly vehicle payment you can afford.

To calculate your DTI ratio, add up all your monthly expenses together. Then, take your gross monthly income and divide it by your expenses. You’ll get a percentage, and if it’s over 45% or 50%, then you may run into issues getting approved for an auto loan. If you’re lower than that, then you’re in a better spot financially to take on a car loan.

To figure out your PTI ratio, take your monthly gross income and multiply it by 0.15. Then, take your monthly gross income and multiply it by 0.20. This gives you a range that reflects 15% to 20% of your income that you can tailor a monthly payment around. Anything higher than 20% of your monthly income, and you’re going to run into issues getting approved for a loan with that monthly car payment amount. Of course, the lower it is, the more flexibility you're giving yourself in your monthly budget.

Remember to factor in the price of full coverage auto insurance in your overall budget, and the cost of gas and regular maintenance. Most lenders automatically factor in $100 a month for insurance when they’re calculating whether or not you can afford the car loan. If you choose a monthly payment that’s on the edge of busting your budget, you may end up with a vehicle that you can’t afford to put gas in, or fix if something happens!

Now that you have a better idea of what you can afford, you can start playing around with an auto loan calculator. Use this tool to figure out how much car you can afford, and you can play around with down payment amounts, as well.

Once you have a vehicle price in mind and a down payment amount you can save for, then you can talk to the dealer about different cars and your max vehicle price. After you choose a car that fits and all negotiations are out of the way, you can work with the finance manager and take delivery with confidence that you can successfully complete the loan!

Ready to Begin Car Shopping?

Don’t be a car payment shopper – be a prepared, informed buyer and know your limits. Once you set your goal, you can set yourself up for success with your next auto loan and shop with confidence.

However, shopping with confidence is hard when your credit score is suffering and lenders turn you down for car financing. If you’re ready for your next auto loan, start looking for the right lender for the job. Here at CarsDirect, we’ve got the connections for bad credit borrowers.

We have a nationwide network of special finance dealerships that are signed up to with bad credit car lenders who have the experience and resources to work with all types of credit situations. Skip the hassle of driving all over town looking for a lender, and start with us by filling out our free auto loan request form. We’ll look for a dealer in your area, and there’s never an obligation to buy anything, so get started now!


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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