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How Much Should I Spend on A Monthly Car Payment?

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July 24, 2022

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

Sources:

https://www.edmunds.com/car-loan/how-long-should-my-car-loan-be.html#: :text=The%20average%20loan%20term%20for,loan%20not%20too%20far%20behind.

https://www.foxbusiness.com/markets/average-car-payment-hits-record-712-month-new-used-car-prices-continue-climb

https://www.forbes.com/advisor/auto-loans/average-car-loan-interest-rate/


If you would like to receive more information on making smart money moves for your future, be sure to contact us today!

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About the author

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Brandon Hayes

Managing Director, Private CFO®

In 2011 Brandon opted to forego a long-term career in corporate America to join oXYGen Financial because he was impressed by the vision of creating a premier independent financial services firm, which strives to provide unbiased advice to the X & Y Generations.

A native of Westlake, Ohio, Brandon currently lives in Atlanta with his wife Aly, daughter Maryn, son Turner, and their black lab Pepper. He's the youngest of three children and played soccer through college at Elon University. He's an avid runner and enjoys cheering for Cleveland sports teams despite some pretty rough years.

Credentials/Certifications:
CERTIFIED FINANCIAL PLANNER™ and MBA from Georgia State University in Entrepreneurship. Brandon holds his Series 7 (General Securities Representative), 63, Series 65 (Investment Advisors Law) and Georgia Life, Health and Variable Insurance licenses.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Background and qualification information is available at FINRA's BrokerCheck website.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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