Calculating a Car Payment, Why Smaller Isn’t Always Better


It’s summertime, which means one thing – it’s car buying season. Manufacturers ramp up sales and, soon, next year’s models will be hitting the showroom floors. Buying a car is one of the most major purchases many make, aside from buying a house.

That being the case, most car buyers need to take out loans to drive home with new cars. When we’re sitting at home calculating a car payment, it’s important to understand that smaller isn’t always better. We’re trained to think that such a monthly obligation should be as low as possible. Recent reports, however, indicate otherwise as loan lengths have reached a record of 67 months, with loans lasting up to seven years in length reaching nearly 30 percent.


Calculating a Small Car Payment Might backfire

When you take on debt, you want it to be as little as possible. It makes complete sense as you don’t want to spend more than you need. Taking on such a long car payment puts the focus on buying as much car as possible instead of keeping the overall cost as minimal as possible.

Put another way, when car loan payments are strung out over 6-8 years, it’s generally done to buy more car than you need. This catches us in the payment mentality myth that it’s ok to have a monthly car payment.

There are a few ways to combat this, such as:

  • Not telling the salesperson the monthly payment amount
  • Saving as much of a down payment as possible – preferably at least 20 percent of the overall value of the car

Instead of focusing on the monthly amount you can “afford,” focus on what’s going to cost you the least overall for your long-term financial health.

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You Put Yourself in A Losing Equation

A car is a depreciating asset. There is no way around that fact. The moment you drive it off the lot you are guaranteed to lose value. As a result, a smaller loan payment might seem like a better deal but puts you on the losing side of the equation.

A long car loan puts you at risk of being underwater on the loan. Imagine that you want to trade in that car five years from now and you took out an 84-month loan. That means you’ll still be responsible for two years worth of payments. That is money you’ll either need to pay off prior to the purchase of the new car or roll into the new loan. Thus, simply continuing the cycle of debt.

If you’re looking at the prospect of buying a new car in the future, ask yourself what that extra debt will mean to you. Will it keep you from paying off other debt? Will it keep you from saving for retirement? Will it keep you from saving for you kids’ college? Be real with yourself and use that to help guide your new car purchase.

Focus on the Total Cost to Win

Rather than focusing on the monthly cost a new car is going to mean to you, look at the total overall cost and what that’ll mean for you. There are various free calculators available online that can help you figure out just how much a car purchase will cost you over the life of the loan.

If the results point to an amount that seem too high to you then look for ways to lower that amount. Some of those things might be:

  • Putting down a sizable down payment (at least 20 percent)
  • Shopping around for better interest rates
  • Trading in another car

There are other ways to lower the amount of your purchase, though the takeaway is to not be in a rush to buy your new car, but to take your time to find what fits you best and costs you the least amount over the life of the car.

Buying a new car can be exciting. Don’t let the new car smell cause you to forget that far more goes into the cost than the amount of the monthly payment.

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