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It’s important before getting yourself in debt to leverage a Car Payment Calculator that helps you determine your monthly car payment and the time it would take to pay off your debt.

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by increasing your monthly payment.

Adding extra to your monthly payment would reduce your principal balance faster since more money would be left over after finance charges. Having a lower balance sooner in turn reduces your interest payments, as your interest rate would apply to a smaller amount and compounding would be diminished. In short, you’ll save a lot of money in the long run and get out of debt much sooner – if you can afford to scrimp now. But we know that adding extra to your monthly bills could be a big deal!

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on interest if you are willing to make payments every two weeks

Making smaller payments more frequently is a great way to build discipline and improve budgeting efforts. It will also save you money on interest and help you get out of debt sooner. How? By making more than one payment per month, you would reduce your average daily balance – the amount your APR applies to. You would therefore pay less in interest each month. With lower monthly costs, more of your budgeted monthly payment will apply to your principal balance and you’ll be back above water ahead of schedule.

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by reducing the loan term to Months

The longer your loan term is, the more you’ll pay in interest. That’s because interest compounds over time, which means a given month’s finance charges are the result of applying your account’s APR to the sum of your principal balance and the interest you were charged the month before (and the month before that, etc.). In order to use this saving strategy, however, one must be able to afford higher monthly payments. You’ll save on interest in the long run; fewer monthly payments simply demand bigger monthly contributions.

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by increasing your down payment

With a higher down payment, you won’t need to borrow as much. As a result, your loan’s interest rate will apply to a smaller amount from the start, with your monthly savings compounding over time. Monthly payments would also be more manageable. The obvious impediment, however, is short-term affordability. Most people put down as much as they think they can afford, and coming up with a few thousand dollars extra is a big ask. But if you comfortably afford to place a higher deposit, without jeopardizing retirement savings or your emergency fund, your wallet will ultimately thank you.

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Cities that Overspend on Cars

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Ask the Experts

Buying a car isn’t as straightforward as shopping at a department store. The former involves multiple steps and requires prior research, a reasonable budget and some negotiating skills. But buying isn’t for everyone, either. For guidance on the proper way to purchase — or lease — a car, we asked a panel of experts to weigh in. Click on their profiles to read their bios and thoughts on the following key questions:

  • What are the most common mistakes people make when shopping for a car?

  • In what circumstances is leasing a smarter option than buying?

  • Generally, what percentage of take-home pay should go to car payments?

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Fassil Fanta

Assistant Professor of Economics in the College of Business & Mass Communication at Brenau University Fassil Fanta What are the most common mistakes people make when shopping for a car?

Car buying can be overwhelming and it is common for mistakes to be made. Whether you are buying new or used, there are steps you can take to ensure you’re getting what is right for you. Here are 3 of the most common mistake even a seasoned shopper makes:
  1. Not doing your homework. Technology nowadays has simplified the car-buying process. Before you step foot onto a dealership lot, be sure to spend a little time on the internet analyzing the facts, features, and pricing and financing options for the vehicle you are interested in. It is also a great way to check out other competitor dealers. So get prepared before you buy. Otherwise, you may end up buying a used car which is ‘lemon’.
  2. Rushing to buy. Car dealers love a buyer who is in a hurry; they feel it gives them the higher hand and ability to stiff the buyer. Car are commodities, there will always be more available. Do not rush into purchasing a car, take your time and be sure you are getting what fits your needs.
  3. Trading in your old car. Trading in your old car is one mistake that will always cost you money. If you own your old car or you still owe money on it, you are better off selling it on your own then getting involved in the trade-in process. The trade-in process gives dealers a chance to take advantage of your time and play with the details of your purchase.
In what circumstances is leasing a smarter option than buying?

Leasing and buying both have their advantages and disadvantages. If you are accident prone or more likely to travel more and put higher mileage on a vehicle, then leasing is not for you. Most dealerships will charge for extra mileage that is outside the lease agreement and for any damage done to the interior and exterior of the vehicle. Leasing should be considered if you are looking for a way to save money during the present. Long-term buying will save you more money, but temporally leasing tends to save money with cheaper loans and car payment. So if you are concerned about current financial arrangements do some research and look at your options for leasing. You always need to compare cost and benefit of each option to make a rational decision.

Generally, what percentage of take home pay should go to car payments?

There is a difference between how much can you afford and how much you should spend on a car. Are you frugal? Can you compromise? You really love your cars? Most people tend to fall between the frugal and compromise section and will generally spend between 10% - 25% of their take home pay on a new or used car. In general, car payments should not exceed 20% of the monthly income.
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Maroula Khraiche

Assistant Professor of Economics and Finance in the College of Business and Entrepreneurship at University of Texas Rio Grande Valley Maroula Khraiche What are the most common mistakes people make when shopping for a car?

First, if you're buying a used car, make sure you have a mechanic of your choice check it out. This expense is worth it.

Secondly, make sure you look up the price of the car you are considering before you go to the dealership (there are several websites that offer this information). You're going to want to negotiate the price up from the manufacturer's suggested price to somewhere below the price advertised by the dealership. This way you will probably end up with a lower final price than negotiating down from the advertised price by the dealership. Additionally, make sure when talking to the salesperson that you are discussing the final price of the car, not the monthly payment. Even better, do not tell the salesperson whether you're buying or leasing yet. Wait until you agree on the final price.

Finally, research two important pieces of information before you go to the dealership: first - the type of car you want and second - financing options.

Research cars that have the safety features you're looking for, gas efficiency and the options you want. Make sure you have several models in mind and make sure you test drive all the options before you commit.

If you have no idea what kind of car loan you qualify for, you will probably lose money on higher interest offered to you by the dealership. Therefore, make sure you know what level of interest rate you can secure from other options (banks, online options, etc.) and ask if the dealer can beat the interest rate you got somewhere else.

Get the extras you need. If you live in the Northeast for example, adding some features that helps you drive in the snow might be worth it. However, these extra features might not be necessary if you live somewhere warm.

Finally, keep in mind that if you decide to lease a car instead of buying it with a loan, you will be paying finance charges either way.

In what circumstances is leasing a smarter option than buying?

One of the reasons people lease instead of buy a car is that they can't afford the monthly payments of a loan. Leasing could be a good alternative to taking a six year loan and buying a car. This is often the case if you want a car whose price is more than you can afford.

But if buyers lease, they will have to limit the number of miles they drive to an agreed upon cap set by the leasing company or they will be charged for the extra miles which can increase the monthly lease payment. Additionally, when driving a leased car, you have to be extra careful with keeping it tidy and scratch free since the leasing company can charge you for any extra wear and tear. So leasing is a good idea if you drive short distances on average and tend to keep your car clean.

A second popular reason for leasing a car is that you do not intend to keep the same car for a long period of time (beyond 2 years). If you like to change cars often, then leasing is the better option. When you take out a loan, selling the car too early is not a good idea. Once you drive the car off the lot, the car loses value, but the loan is tied to the original price of the car. So for the loan to be worth it, you should hold on to the car for a number of years.

A third reason to lease is that you want to have a reliable car with the more recent safety features (which are important and sometimes are a huge improvements on older features) but simply can't afford such a car. Therefore, you don't have to worry about any repairs when leasing, which some people value enough to give up owning a car that they can resell.

Generally, what percentage of take home pay should go to car payments?

Anywhere from 10-20% of income is generally OK to pay for a car but where exactly in this interval you end up will depend on your circumstances. If you buy a more expensive car that can save you money through its safety features, gas efficiency and avoiding repairs, then it might be a good idea to spend a bit more. But if you are comfortable with making the occasional repair and don't drive very often and other do not depend on you to drive them places, then the cheaper option might be better. Remember, if you do decide to buy a more expensive car, you can always eliminate some other expense to make the car affordable. For example, if you go on vacation once a year, skip the vacation one year. Basically pick one costly activity and eliminate for one year or six months.

Remember, if your car is stolen or you get into a major car accident, you might owe more on the car than the insurance pays you. Therefore, if you decide to buy an expensive car, make sure you look into Gap Insurance.
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Greg Luce

Associate Professor of Management & Marketing at Bucks County Community College Greg Luce What are the most common mistakes people make when shopping for a car?

The most common mistake people make when shopping for a car is not setting a specific budget before they start. Before looking for a new car, buyers need to set a specific budget for themselves and stick to it. Once they get into the dealership, they can easily be drawn into the allure of a car they simply cannot afford.

In what circumstances is leasing a smarter option than buying?

In my opinion, leasing is never a better option than buying. So often, consumers like the low monthly payment that comes with a lease, but what they do not consider are the numerous fees, hidden expenses, and limitations included in most lease agreements. If someone is considering leasing a vehicle, I strongly encourage them to carefully review the agreement to understand the terms before they agree to them.

Generally, what percentage of take home pay should go to car payments?

I recommend limiting monthly car payments to 10-12% of take home pay. When you consider the variable costs of owning a car, including fuel, maintenance, insurance, etc., overspending on monthly payment does not necessarily allow for these additional expenses.
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Ken Johnston

Chair and Associate Professor of Finance at Berry CollegeKen Johnston What are the most common mistakes people make when shopping for a car?
  1. Negotiating down from the sticker price rather than up from invoice price. The sticker price is just some made up number. However their ability to negotiate will be impacted by the popularity of the car. Dealers can sometimes sell at invoice and still make money because they get money back from manufacturers.
  2. Don't watch out for bogus invoice "costs" such as rust-proofing, fabric protection, inspections etc. Negotiate hard on these.
  3. Quick decision making; car dealers put a lot of pressure on buyers to make quick decisions. Taking the material home to slow the process down makes it less likely to misjudge. They can always build another car if the one you want gets sold.
  4. If you have a trade-in, do not mention it until after a price has been agreed on for the new car. Otherwise, the situation could get confusing. You want to first get a real price on the new car. Negotiate one thing at a time.
In what circumstances is leasing a smarter option than buying?

If you intend to keep a new car for only two to three years, leasing generally makes more financial sense, unless you put a lot of mile on a car annually (20,000 or more a year - buying is cheaper).

Generally, what percentage of take home pay should go to car payments?

I don't have a specific percentage; just be sure that the payment fits your budget and in this budget you are putting enough away to meet your other financial goals (retirement, etc.). Be aware that car dealers can make it fit your budget by increasing the term of the loan (but that increases interest), that's why we’re starting to see more 72 month car loans. So, along with "does it fit my budget", one needs to look at the total interest cost of the loan.
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Amitabh Dutta

Associate Professor of Finance in the Bisk College of Business at Florida Institute of TechnologyAmitabh Dutta What are the most common mistakes people make when shopping for a car?

In my opinion, the most common mistake people make in shopping for a car is not taking into account the “total” cost of car ownership. Besides the monthly payment to finance the vehicle, one should also factor in:
  1. Gas mileage (so on average your monthly miles and then how many gallons to travel them);
  2. Insurance (even if you afford the loan on a convertible, the insurance may be a deal killer);
  3. Maintenance (recently, a local car dealer is offering 2 years of free oil changes – that may make the car “affordable”);
  4. Repairs (if the 2 years of free oil changes is on an import such as BMW or Porsche – potential repairs may be a future wallet-breaker). Now, I know it’s hard to quantify what potential repairs may occur in the future – but at least one can and should take a look at previous years’ models (if possible) and what reports are available from sources such as Consumer Reports about reliability.
In what circumstances is leasing a smarter option than buying?

I have always believed leasing is practical if it is a tax deductible expense – so, for example, if you are self-employed and can show that the vehicle is used for business purposes. However, I am not a tax expert – but I do believe you will have to maintain records of business usage and separate it from personal use, such as a vacation road trip.

Generally, what percentage of take home pay should go to car payments?

Opinions vary – some say 10%, some say 15%, and some say 20% - I don’t think anyone would say more than 20% of take home pay (not gross pay) is appropriate for a monthly car payment.

My personal take is somewhat different – I would advocate a range of 18-22% of take home pay as the “total” cost of a car payment: loan repay + approximate gas $ + monthly insurance + one-third oil change (quarterly service).
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Sahit Murat Kara

Professor in the Department of Accounting, Economics and Finance at Angelo State UniversitySahit Murat Kara What are the most common mistakes people make when shopping for a car?

The most common mistake people make when shopping for a car (or anything else) is to lose sight of their budget, their existing and forthcoming financial obligations. Most of us are already burdened with high amounts of debt and, although we are not thinking about it at that moment, in a few months we will have to have the roof of our house redone, or have to replace the AC unit. Not the best time to purchase the $50,000 dream truck, is it?

Never spend (or borrow) beyond your means.

Moreover, car ownership has many other costs besides the car payment. One has to figure in the insurance cost. Always keep in mind that insurance cost varies wildly with the type of the vehicle. Same driver will pay more for insuring that type of car versus the other type of car. The cost of tax, title and license - these also change from vehicle to vehicle; then, the annual registration cost. The cost of maintenance has to be figured in also, and that, too, varies wildly with the type of vehicle. Depending on which part of the country you live and work, you may have to figure in the cost of parking which, in some cases, can be almost as high as the car payment! Gas is cheap now, but, it still was not free when I filled my tank the last time - the cost of gas has to be factored in as well.

Then, there are the actual actions for buying the car.

I am assuming the car is being financed since we are talking about car loans. This has two critical steps. The first step is pricing. For this, you have to do your homework. And, I mean it: you have to do real hard research. After going through all the things I have been talking above, you are left with a few makes - models that you will make your choice from. You do the research, look up prices of those cars in several different places, look for specials, especially from big city dealers in your vicinity, and look around the internet. You must have a very good idea about the prices of the cars on your list before you set foot in the dealership. Negotiate the price. Negotiate hard. Do not rush. Take your time. Leave; you can always come back the next day, next week. It is your money. Sometimes, they tell you a price and then, you find there have been several "add-ons" which make the total price higher (like "preparation" and many other things). Remember, the final price of the car will determine how big the loan and your monthly payments will be. So, that is the critical figure you should watch for. What is the figure that will be written on the bottom line; at the end of the bill? That is the number you are negotiating for; do not ever forget that.

Now, we know what is written on the bill, we know how much we are supposed to pay for this deal.

Then, it is the time to finance the car. Financing is the second step. Remember, we had two steps. The first step was pricing. The second step is financing. It is very important that you make a loan application from your bank (or financial institution) and obtain a pre-approval for a loan before you are ready to talk to a dealer. Making a loan application does not oblige you to anything. Your bank (or financial institution) is just giving you a letter (if you are approved) showing how much the bank will lend you and what the terms of the loan are (interest rate, how long, etc.). Again, you do not have to take that loan. It is just a piece of paper, nothing to be scared about. Most dealers will have their in-house financing or the manufacturer has its own financing. If those offer you better terms, like lower interest rates, lower fees, etc., you take it. If it is not a better deal, you have your bank to go back to. The second step is where many mistakes happen. People get offered a car loan with low interest, but it turns out that there are many additional fees that you have to pay. When those are figured in, it becomes a high interest loan. People are guided into high interest loans, because their credit was not very good. Well, I wish you had listened to me and got a pre-approval from your own bank before you signed that high interest loan.

In what circumstances is leasing a smarter option than buying?

Businesses are allowed to deduct lease payments as expenses; it will save them taxes. People are not allowed to do that. So, leasing has tax advantages for a business, it does not have that for people.

Long answer: We know how much the lease will cost. There is the cash payment at time of lease, plus lease payments times so many months (usually 36 months). One must be careful; some leases might have additional payments at the end also. This is rare, but one has to be careful. In addition, you will be charged if you go over the allowed miles and those charges can be very high. There will also be charges if the "wear and tear" is more than usual. Suppose, none of that applies to you. So, there is the total cost of the lease (initial payment + total lease payments). At the end of the term, you give the car. You paid out, for example, $25,000, and at the end of 36 months, you have nothing. You gave the car back. Almost all leases will give you the option to keep the car by buying it at the end, and that price is known in the beginning. But, for our purposes. let's say you gave the car back. Remember, $25,000.

If you had bought the same car with a 36 month loan, instead of leasing, let's say, your car payments totaled to $30,000 at the end of 36 months. You paid out the car. The car is yours. How much will you get for that car if you sell it at that moment? Suppose, the car will bring $7000 if you sell at the end of 36 months. That makes buying better.

How? Lease was $25,000, you have nothing at the end. Buy was $30,000, but you get back $7,000 by selling the car, meaning you are out $23,000.

You drove the same car, same miles, same condition, for 36 months. If you bought, it cost you $23,000. If you leased, it cost you $25,000. Buying is better in that case; it is $2,000 cheaper.

Generally, what percentage of take home pay should go to car payments?

Much more important than this number are the issues that I presented in the first question. The bedrock of personal finance is not to live beyond our means. Most sources give this between 10 to 15% of net income.
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Joseph Cunningham

Assistant Professor of Accounting at Albright CollegeJoseph Cunningham What are the most common mistakes people make when shopping for a car?

The most common mistake people make is finding out the monthly payment they can afford and selecting a vehicle that fits the payment.

My recommendation is sitting down and listing what basic needs you for have for your vehicle. Search out the vehicle that fits your needs and budget.

In what circumstances is leasing a smarter option than buying?

The circumstances when leasing is smarter are when you own a business and the vehicle is used 100% by the business. All costs related to the business use of the vehicle are tax deductible.

Only lease a vehicle when you absolutely have to have a car, say for work. Only lease it until you can save and afford to purchase one on your own.

Generally, what percentage of take home pay should go to car payments?

The personal finance literature I have read suggests a range from 15% to 20%. My goal is to put the most money down on the vehicle; the less money is then needed for a car payment. Also, ensure there is no penalty for making accelerated payments. That reduces the total interest cost on the loan.

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