The Top Three Rules You should Remember when Going for Car Financing

Most of us have a good idea of the car we want if we decide to purchase a car – whether it’s for the first time or the n^th time. But along with an idea of what we would like, we also have an idea of how much we can afford. Your car budget can have a big impact on your life in the next few years, so you should make sure to think about it as carefully as you can. Some experts would say, for instance, that spending about 35% of your income per year on a car would be ideal, while there are those who would recommend a more frugal (and reasonable) 20%. It will ultimately depend on you, of course, but apart from your budget, you should also think carefully about your car’s financing. Financing also counts, and you want to get as good a deal as you can. If you are worried about car financing and would like to make sure that you’re not paying more than you can afford, here are the top three rules you should remember when going for car financing.

1. Give a 20% down payment

The first rule is not something that all of us want to hear, but it's important just the same: give a 20% down payment when you can. The truth is that a new vehicle will lose about 9% of its overall value as soon as you drive it from the dealership. At the end of the car's first year, it will already have lost around 19% of its value. Imagine how big a depreciation this is. So, if you put down less than 20% as a down payment for your car, you will end up having to pay more than the car is worth by the end of your car financing or loan term. This is a term referred to as 'being underwater' – when the debt you owe on a car is worth more than its value.

And here's the thing as well: if you have to sell your car prior to paying off your loan, you will have to make up for the difference – the difference between the value of the car and your loan balance. It's always best to come up with at least 20% as a down payment for your car, so you don't pay too much for it and you can get a better deal and interest rate as well.

2. Go for a shorter term

Another rule is this: go for a shorter term. What does this mean? It basically means that you should go for as short a loan term as possible, because the longer your car's loan term, the higher the interest. Also, if you go for a longer term, the more you will have to work to meet the insurance requirements of the lender, which means a higher rate as well. If you're still paying off your loan in four years, your car will already have lost most of its value, so experts recommend four years as the maximum term for car loans. If you can, try to go for a 3-year term – this often gives you the best deals.

3. Your total payments shouldn’t be more than 10% of your monthly income

The third rule is that your total payments – which include the principal, the insurance, and the interest – should not be more than 10% of your monthly gross income, as the car experts from the Young Automotive Group will tell you. If you go for your dream vehicle and it ends up eating up all of your budget, then it isn’t worth it. If your car payment stays below 10% of your income per month, then you can still put money towards other expenses, such as a vacation, savings for a house, and emergency money. And even if your circumstances change – if you lose your job or have a cut in your paycheck – you can still pay off your car loan without being dragged down by the cost.

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