Rising car prices and loan rates can spell disaster for drivers.
- Car prices have risen this year due to supply chain shortages.
- That forces borrowers to take out higher car payments — and puts their finances at risk.
- Compare your total monthly expenses with your income to determine the monthly car payment you can afford.
Buying a car has always been an expensive prospect. But these days, vehicles are even cheaper because of the huge shortage.
The core of the problem is actually the lack of chips – a problem that started during the COVID-19 pandemic and has not been solved. Ultimately, automakers saw production slow down, which resulted in limited vehicles for sale. And whenever you have a situation where the quantity of a given good is not enough to meet consumer demand, the price tends to go up.
It is not surprising, then, to learn that car loan balances increased at the national level during the third quarter of 2022. This per a new report by the Federal Reserve Bank of New York. But what’s even more surprising is that auto loan debt increased by $22 billion. That suggests many consumers are taking out large auto loans — and may be at risk of losing them.
If you need a car, you may have no choice but to finance it with a car loan. After all, you probably don’t have $30,000 or $40,000 just sitting around. savings account pay for a new car outright.
But if you are going to take out the cost of a car loan, you need to make sure that it really fits your budget. Otherwise, you could be setting yourself up for a world of financial stress.
How many cars can you afford?
There’s a formula that consumers are advised to follow when buying a home — don’t let your housing costs exceed 30% of your income. But buying a car is trickier, because such a formula does not really exist in that context.
So, your best bet when buying a car is to look at your total fixed monthly expenses, compare that to your income, and see how much room you have left. Let’s imagine you bring home $3,000 a month, and you now spend $2,000 a month on basic necessities like housing, food, utilities, and health insurance. That leaves you with $1,000 left over — but that doesn’t mean you can afford a $1,000 monthly car payment.
You might need a few $1,000 to pay for non-essentials like streaming content and social events — things you might not want to cut out of your life. And you may need that money to increase your savings or to finance you sinew for retirement So your best bet for literally Take a close look at those numbers and get a decent car loan payment.
High loan rates can be a problem
Unfortunately, not only are car prices on the rise these days, but so are car loan rates. In fact, loan rates are higher across the board, which makes it a pretty bad time to finance a car.
If you are going to apply for a car loan, see if your credit score is in good condition. The higher the number, the lower the rate you are likely to qualify for. A lower rate can make you less likely to fall behind on your loan payments.
Remember, getting a car that is too expensive can have many negative consequences. If you are late paying your loan, it can cause your credit score to plunge and put you at risk of having your vehicle repossessed. So you better land on a decent car payment — even if that means stepping back to a vehicle that’s missing some of the features you want.
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