The cost of owning a car can be incredibly expensive. If you finance your vehicle, you’ll make a monthly loan payment over the course of several years, which includes interest.
More expensive vehicles typically have higher car payments, but there are other factors that impact your monthly payment, like the loan term and the down payment.
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Average Monthly Car Payment
As of July 2022, the average monthly car payment is at a record high of $733. That’s pretty expensive for most people. However, your actual monthly car payment could be much lower. Here are some of the factors that affect the cost of your monthly car payment:
The Total Loan Amount
The total amount of money you borrow determines what you’ll pay per month. For example, if you’re buying a $60,000 luxury car at 3% APR with no money down and paying it off over five years, you’ll be responsible for paying about $1,078 per month. But if you’re buying a $30,000 car at the same APR with a five-year loan term, you’ll only pay about $539 per month.
The Interest Rate
Your interest rate is the cost of borrowing money from your lender. The higher your interest rate is, the more you’re going to pay each month. If you can qualify for a low interest rate and choose a short loan term, you’ll pay the least amount of interest over the lifetime of the loan.
The Length of the Loan Term
Car loan terms typically range from two years to seven years. When you choose a longer loan term, you pay less each month, but you have more payments overall. With shorter loan terms, you pay more each month, but you build equity in your car faster. Short- and long-term loans each have their advantages and disadvantages.
Your Credit Score
As with many big financial purchases, your credit score plays a significant role in the cost of your auto loan. If you have excellent credit, most lenders will reward you with a lower interest rate. But if you have poor credit or no credit, lenders typically charge higher interest rates.
How to Get a Lower Monthly Car Payment
Your car payment is based on a variety of factors, and some impact your monthly rate more than others. However, there are ways to get a lower car payment if you’re on a budget.
Buy Used
Buying a used, pre-owned, or certified pre-owned vehicle can be a great option if you want a lower monthly car payment. In most cases, buying a brand-new car is the most expensive choice, especially if you can’t afford a big down payment. Because used cars cost less, the loan payments are usually cheaper.
Lease a Car
Leasing is essentially renting a car for a fixed period of time. When you get a lease, you’ll have monthly payments, but they are usually lower than monthly loan payments. Leasing can also be a great alternative for people who want a new or luxury car but can’t afford to purchase a more expensive car in full.
Refinance Your Loan
If you already have an auto loan, you might consider refinancing the loan to lower your monthly payment. Refinancing a loan is the process of swapping your old loan for a new one, usually with a better interest rate or a longer loan term.
How to Choose the Best Monthly Payment for Your Budget
Car ownership is inherently expensive, no matter how good your credit score is or what type of car you have. Choosing the most affordable monthly payment for your budget will help you avoid unnecessary debt. Here are a few tips to help you pick an appropriate monthly loan payment.
Create a Budget
Before you start car shopping, make a detailed budget to see exactly how much car you can afford. This should include the sticker price of the vehicle, as well as car insurance, maintenance, and gas costs. Your monthly car payment is only the cost of owning the car. It doesn’t account for all the other expenses you have to pay, which add up quickly.
Decide What Kind of Car You Want
Your monthly car payment is going to vary significantly based on the type of car you want. New car payments are usually more expensive than used car payments. If you want an SUV or truck, be prepared to pay more each month than you would pay for a sedan. If you’re on a tight budget, figure out what type of car will meet your needs and personal preferences, while also being wallet-friendly.
Use a Car Loan Calculator
When thinking about a car loan payment, it can be helpful to use an online calculator. You’ll input information such as the total price of the car or the loan amount, the interest rate, your down payment, and the loan term. You can adjust these figures to see what car price, interest rate, and loan term you should select to get your ideal monthly payment.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
Source: www.caranddriver.com