Running a car is one of the costliest bills to come out of a monthly budget, rivalling mortgage or rent prices. Many Americans are also going into debt to pay for their vehicles by taking out auto loans, as the average price of a brand new vehicle is around $32,000.
According to a new report by Experian Automotive, many Americans are struggling with auto debt, as auto loan terms are reaching record highs. Apparently, 25% of all new vehicle loans were extended from 66 to 84 months.
The study also found that the average loan amount financed for a new car had rose to $27,612, which means the average monthly payment in the first quarter would be $474. As a result, more and more people are taking out car leases over expensive loans. However, leasing a car means you never actually own the vehicle, and it can often be difficult to escape the contract in the event of financial problems. So think very carefully before you take one out. Remember, you will always have to give the car back after the lease, but the car would be yours once a loan has finished.
In order to help you stay out of auto debt, we thought we’d provide some helpful financing tips for both new and experienced drivers.
The 20/4/10 Rule
If you are thinking about financing a new car, you should follow the 20/4/10 rule. It’s simple, really. You should only put down no less than 20% on the car – as this will help you pay a big chunk of the debt off before you even enter it. Think of it like a mortgage deposit.
You should also ensure you finance it for no longer than 4 years, or you’ll still be paying the car off once it’s old, beaten up or broken down. You will want to get rid of the debt as soon as possible, so if you can’t afford it then don’t buy it. Running a car is expensive and can eat away at a person’s budget, and the last thing you want is to be stuck with a debt you don’t want or need.
Never let the total monthly vehicle expenses surpass 10% of your gross income. If you have to spread out the repayment amounts over a 6 or 7-year period then maybe you should think twice about investing in a car, as you probably can’t afford it.
Can’t Afford a New Car?
There’s no shame in being unable to afford a new car. Many financial advisors will be the first to tell you that financing a new car is only a good idea if you have a reliable income and are an experienced driver.
You’ll be surprised by how many used cars are on the road. By buying a second-hand car outright over a new vehicle, you won’t sink into debt. Only buy a car you know you can afford; otherwise, you’ll end up wishing you never bought the thing in the first place.