Last Updated on
Are you thinking of How to Create a Healthy Budget for Your Car Loan? Smart car buyers prepare their auto loan expenses in advance to enable them to maintain excellent payment histories. This directly leads to improved credit scores and increased credit limits. If you do have awful credit you can still find cars with no credit checks by simply applying today.
Do you need to hire a financial consultant in order to figure out your budget? You don’t because today, you’ll learn these eight amazing tips on How to budget for a used car. It doesn’t matter whether you’re self-employed or have a permanent job.
1. 8 Amazing tips on How to Create a Healthy Budget for Your Car Loan
Table of Contents
1. Keep your monthly installments below 20% of your gross income
Financial consultants recommend paying no more than 20% of your gross monthly income on an auto loan installment. This rule gives you two advantages. It enables you to continue paying your mortgage installments on time because it still leaves a huge portion of your net income.
Maintaining your auto loan installments below 20% also enables you to get various secured debts such as a bank loan. When loan officers analyze your bank statements and realize that your auto loan installments are within this recommended range, you’re certain of getting a loan.
2. Reduce your debt-to-income ratio
The CFPB exists to protect consumers from unfair credit lending practices nationwide. This credit regulatory institution advises credit consumers to maintain a 43% debt-to-income ratio. Why? Because at this rate, you can pay debt installments on time and still have enough net income left over to meet your monthly needs.
Make sure you clear any outstanding bank, student, and payday loans before applying for an auto loan. If your credit report shows some debts marked as outstanding but you cleared them, raise this issue with the relevant creditor. This is the only way to comply with the CFPB’s debt-to-income ratio and pay your car loan installments on time.
3. Clear your auto loan within 48 months
You’ve probably heard that choosing long repayment periods for a car loan enables you to pay lower monthly installments. While this statement is true, most car dealerships won’t tell you that you risk servicing an upside down loan. This is whereby the total cost of an auto loan exceeds the value of a car by at least 50%. Obviously, this is a huge disadvantage on your part because you cannot recoup high-interest charges after selling your car.
It’s advisable to buy a car that’s within your means because you can pay up the down payment and installments conveniently. Like a car that would take you two years to buy had you opted for a cash purchase.
4. Pay at least 30% upfront
Why do financial consultants advise potential car buyers to pay huge down payments when purchasing cars using auto loans? It has two important advantages. Down payments appear in your payment history that are then recorded by various credit reference bureaus. So, paying a huge cash deposit will help you create a good first impression when future creditors download your credit reports.
Smart car buyers pay at least 30 % upfront to reduce their outstanding car loan balances. After the car dealer or bank spreads the outstanding balance over a 36 or 48-month repayment period, each monthly installment amounts to less than $500.
5. Avoid late payment fines
While skipping a couple of car loan installments won’t damage your credit score, it increases your auto loan expenses. Late payment fines are costly because some creditors charge a fixed amount for each day after the deadline. It can get as high as $50 per day! Delaying for one week will make you pay a fine that’s almost equivalent to your overdue installment.
If you’re self-employed, make sure all your clients pay up their invoices at least one week before your auto installment payment date. Visit your bank and apply for standing orders to ensure that the creditor still receives their installments on time even when you’re away on business trips.
6. Keep your recurring car expenses below 20% of your monthly gross income
Did you know that car dealers expect you to get a comprehensive auto insurance cover when buying using an auto loan?
Some auto insurance companies expect a car owner to pay 8 % of the car’s value each month. That’s why you should choose a car with a modest price tag to enable you pay auto insurance quotes on time. On top of your auto insurance payments, there’s fuel, parking, and washing expenses that occur daily.
If you’re not expecting a shift in your gross income soon, consider eliminating unnecessary expenses in your life to boost your net income promptly.
7. Save up for car servicing costs
Car dealerships expect you to maintain your car in excellent condition while paying your auto loan installments. Why? Because despite paying a cash deposit up front, you don’t own the car yet. Your creditor will hand over the car keys and title after you pay the final car loan installment.
You’ll need to take your car for servicing after every six months. Unfortunately, auto loan installments don’t include servicing costs. That’s why you need to create a savings plan at least three months before each car servicing deadline.
8. Consider refinancing your auto loan when interest rates drop by a huge margin
An auto loan refinancing plan helps car buyers to save money by repaying their outstanding car loan balances at reduced interest rates. Car loan refinancing is the best option for a car buyer who had to settle for a costly interest rate when applying for an auto loan. Your new repayment plan enables you to continue paying all your auto loan installments on time and directly improve your credit rating.
3. Start applying these 8 tips on How to Create a Car payment budget
Based on the information you’ve just read, it’s clear that you don’t need to hire a personal financial coach to help you budget for your car loan. Proper budgeting enables you to have enough money to deal with unexpected mechanical breakdowns. You also improve your credit score directly because your budget pushes you to pay your car loan installments on time.