What to Do When Car Loan Payments Top Rents in Some U.S. Cities
Reports from Bloomberg and other sources indicate prices of new cars are so high that car loan payments of some borrowers are equal or more than rent payments in some cities in the U.S. June data from Edmunds reveals that a record share of new car shoppers have monthly payments topping $1,000 which, according to the Zumper National Rent Report is higher than the average cost of rent for a one-bedroom apartment in 24 U.S. metro areas.
Bloomberg reports the average monthly car payment reached $712 in May. This monthly car payment is higher than a monthly rent payment in Lubbok, Texas, Wichita, Kansas, and Akron, Ohio. Rent in these cities for a one-bedroom apartment costs $700, $710 and $640, respectively.
Mortgage payments or rent and insurance are typically the biggest monthly expenses for families. Costs of transportation come next, particularly if you finance your car purchase. A vehicle is important for most people who have to travel to and from work, and particularly essential for families who live in the rural areas where public transportation is not easily accessible.
So, how much of your income should go toward your car loan payment? You don’t want to get stuck with a large monthly car loan payment in case you lose your job, or an emergency arises. Defaulting on your car loan payment would mean the possible repossession of your vehicle.
A financially sensible approach to a loan for a vehicle – whether used or new, is to allot 20% down payment and to limit the term of your loan to four or five years. This way you will borrow less, and the car will cost you less in the long run.
Borrowers usually get a favorable interest rate and loan term if you have good credit. Check interest rates and terms offered by different banks and credit unions, in addition to that offered by a car dealer. Many lenders have extended the terms of car loans to seven years in order to attract borrowers, but while your payments may be small, in the long run your car may cost you more as it depreciates every year.
Allocate no more than 10 percent of your gross income to your monthly car payment. This would include the monthly principal, interest and insurance premium.
Remember that in addition to a monthly car payment, having a vehicle will include other car-related expenses, such as the cost of gas, which has increased by more than a dollar a gallon nationwide compared to last year’s prices. You will also need to spend for routine maintenance and repairs.
When in the market for a used car, stop by Carousel Preowned. CarouselPreowned serving Iowa City, Cedar Rapids, Davenport, North Liberty, Marion, and Coralville, IA, is proud to be an automotive leader in our community. We do our best to ensure your complete satisfaction every time you step into our car dealership. This is why we offer the widest selection of used and pre-owned cars, trucks, and SUVs and provide true ease of purchase in Iowa.