How to I.D. & Address this Budget-Busting Financial Burden
For many Americans, a vehicle payment has become a significant source of
financial stress. Rising insurance premiums, higher interest rates, fuel
costs, maintenance expenses, and longer loan terms have increased the
overall cost of vehicle ownership, leaving some households struggling to
keep up. Below, automotive retail analyst and consumer advocate Ray
Shefska, CarEdge [1] Co-Founder, shares insights on how consumers can
recognize when a car payment is consuming too much of their budget, why
payment burdens have become more common, and what steps people can take
if they find themselves financially stretched.
What are some signs that a car payment is taking up too much of a
person’s budget?
You know a consumer bit off more than they can comfortably handle when
they have to cut back on the amount they drive. That is usually one of
the first signs that their budget is stretched. Rather than drive
somewhere they stay home or get a ride with a friend. The cost of fuel
on top of a high car payment is more than many can afford. Another sign
is when someone puts off needed maintenance simply because they must
choose between making the car payment or covering the maintenance. With
rising auto insurance premiums, this puts further pressure on a consumer
who accepted a payment that was already a stretch to make before prices
started spiking upward. Depreciating assets like cars and trucks are not
the type of purchases someone should stretch for, perhaps real estate,
which usually appreciates over time but certainly not cars.
In your experience, how do consumers typically end up with car payments
that take up too much of their income?
The first mistake people make is buying their wants as opposed to
buying their needs. Wants tend to cost more than needs. The second
mistake they make is not closely examining all of their expenses,
leading them to assume they can afford a bigger payment than they
actually can. The third mistake they make is not checking the cost of
their automobile insurance until after they have purchased their new
vehicle, leading to shock at how much their monthly premium increases.
And finally they fall for the payment trap the Finance and Insurance
Manager sets when they sign their loan documents. Unwanted, overpriced
protection packages, longer loan terms, and higher interest rates all
seem acceptable when the F&I manager says, ‘You don’t think the bank
would agree to this payment if they weren’t confident you could pay it
back, do you?’
Have you noticed any changes in recent years that have made car payments
less affordable for consumers?
New car and pre-owned interest rates are much higher today than they
were just a few years ago, which has negatively impacted car payments.
84 and 96-month loan terms also give the appearance of making a car more
affordable when in fact customers agree to pay thousands of dollars more
in interest in most cases.
How can you determine how much car you can afford?
I recommend that no more than 10-15% of your gross monthly income go
toward covering your car, including your car payment, insurance premium,
fuel cost and maintenance.
What should consumers do if their car payment is too high?
Contact the bank that holds the car loan if you are having trouble
making your payment and ask if you can make partial payments for a time
being until things improve financially. Remember, banks want to be in
the lending business not actually the car business, so in most cases
they will try to work with a customer so they don’t have to repossess
the vehicle.
Besides refinancing, what other options are available?
For those struggling with their monthly payments I suggest they contact
each provider they are paying and see if they can negotiate a lower
payment plan to lessen their monthly obligations until they regain their
financial footing. That would include your credit card providers, cell
phone services providers or utility providers. Many government-approved
credit counselling service providers are available for people struggling
financially, and someone in this situation should seek one out.
Will affordability improve soon?
I do not expect affordability to improve any time soon, so buyers need
to thoroughly and completely understand their budgets and limit
purchases to things that they need not necessarily what they want. Save
as much as they can for a down payment and limit their loan term to
avoid paying thousands of dollars in extra interest. Discipline is the
key, make only discipline-informed purchasing decisions.
