The pandemic's complete impact to many industries is still not fully known, but it did trigger some immediate trends that were surprising. One that jumps out is the extremely high demand for cars. Although many Americans weren't driving much at all, the demand for cars skyrocketed since the start of the Covid lockdown. Higher demand coupled with lower supply brings an increase in prices. Supply chain and inventory shortages in the auto industry have perpetuated this rise. As you shop for a new or used vehicle, keep these tips in mind to ensure you are making a healthy financial choice:
Put Down 20%:
- If you can afford to do so, putting 20% down on the purchase of your car will allow you to finance less, and keep your monthly payment lower. As interest rates for car loans increase (currently 4%-8%), you may consider putting more down as there is no guarantee you can make more than your interest rate in the current stock market environment.
Keep Your Payment Below 10%:
- Your car payment should not exceed 10% of your total monthly expenses. With food and gas prices surging, it's more important now than ever to stick to this rule of thumb so you aren't spending more than you are making.
- The average car payment in the United States is now up to $712/month. That doesn't leave much room for the average family to save or spend on essential one-time expenses.
Keep Your Loan Under 48 months:
- Cars are historically a depreciating asset, which means you won't want to finance for too long. Keeping your loan terms under 48 months should allow you to have a paid off vehicle and a larger asset on your personal balance sheet.
- What's alarming - the average car loan in the United States is now over 70 months and trending towards up to 84-months. That's a long time to be paying debt on a depreciating asset!
If you keep these few tips in mind, you and your family will be better off in the long run. Also, if you'd like to check out one of my old posts on tips when buying a used car, feel free to check it out here: https://oxygenfinancial.com/blog/what-to-ask-when-buying-a-used-car