8 Signs Your Car Payment Is Too Much

Many people turn to a car loan when it is time to purchase a vehicle. And while a car loan can be a big help to these buyers, there are situations where a loan can put your financial health at risk.

So, if you want to eliminate some financial stress, keep an eye out for these signs that a monthly payment might be too much for your budget.

It’s important to determine how big your monthly payment is as a percentage of your income.

Many experts recommend that you spend no more than 15% of your monthly income on a car. If you're looking at a payment that exceeds that percentage, you might be better off selling your car and getting something cheaper.

Or, you might want to try to make cash on the side via a part-time job or a side hustle.

Whatever the size of your car payment, it’s important to give yourself a buffer in your budget for unexpected expenses, or even just the occasional night out.

Make sure the car payment isn’t so big that it leaves you with no money at the end of the month.

A big car payment can really cause you stress if you also have other debts to pay each month.

If you already have debt tied to a student loan, credit card, or mortgage, make sure your car payment is affordable enough that it doesn’t leave you drowning in debt.

Not everyone gets a steady paycheck. If you are self-employed or work in a field such as sales or real estate, it's possible that your income fluctuates each month.

If your income is not steady, make sure your car payment is low enough that you will still be able to cover it during less lucrative months.

Some car buyers wrap tax, title, and license fees into their loans. This might be convenient, but it means you are likely paying interest on those fees, which just boosts the size of your car payment.

If at all possible, try to avoid doing this.

Longer loan terms are becoming more popular. They help buyers who might want a lower monthly payment or who don’t have enough cash for a large down payment.

However, over time, loans with longer terms can end up costing you more in interest expense.

If you have negative equity on your current car loan, a dealer might suggest you roll your current loan into a new loan so you can purchase a car.

However, this simply increases the negative equity in the vehicle and adds to both your interest costs and the size of your monthly payment. So, think twice about taking the dealership up on its offer.

It’s important to have an emergency fund to cover unexpected costs. Among other expenses, your emergency fund could come in handy if you damage your car in an accident or need an unexpected repair.

It’s recommended that you should have an emergency fund equivalent to about three to six months of living expenses. Any big-ticket item like a car loan that cuts into your ability to keep money in this fund may be a sign that you’re paying too much for your car.

It’s a good idea to create an estimated car budget when you shop for a new car that can help you keep your loan cost in check.

Remember to factor in the regular costs of owning a car, such as gas, maintenance, and potential repair costs. It’s also important to shop around for the best car insurance to help you save money.