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Common Misconceptions About Monthly Car Payments

This post is sponsored by Capital One. All thoughts and opinions are my own.

It makes sense that you may have thought negotiating your monthly car payment was a financially responsible move. You may even be proud that you pushed back during your last car purchase to get something that fit into your budget.

The truth is, consulting your budget is an excellent start, but it’s not the full picture. According to the second annual Car-Buying Survey from Capital One Auto Navigator there is a divide amongst consumers on the most important financial factors when purchasing a vehicle:

  • 28 percent of respondents are looking for the lowest monthly payment
  • 27 percent are focused on final sale price of the vehicle, and 
  • 20 percent are concerned with total cost of ownership

Here are a few things to consider before your next car purchase: 

Monthly payments aren’t your only transportation expense. 

In Real Money Answers for Every Woman, I talk about the concept of living by percentages. Every category on your budget should be capped by a percentage which guides your decisions so you’re always realistic about which purchasing decisions make sense and which don’t. I suggest 10-15% of your gross (pre-tax) monthly income, but you can’t get carried away and assume that means the entire amount should be the car payment. You have to factor in all transportation costs. Think car insurance, gas, repairs, regular maintenance, etc and remember that the more luxurious the car, the more expensive the maintenance.

Lower monthly payments don’t mean you’ll pay less if you took a longer loan term.

Many consumers will use lower payments with a longer term length as a tool to get a more expensive car to look good in the short-term, but it’ll cost you in the long run. A good rule of thumb for the length of your car loan term is 48 months or ideally less. I like to use auto loan calculators to help estimate the monthly payment and see it all in black and white. 

Let’s take two people (Buyer A and Buyer B) who desire the same car priced at $40,000. They have the same down payment of $2000 and similar credit scores lands them both at a 5% interest rate.

Buyer A opts to take a 48-month loan term, making the monthly payment $875.

Buyer B opts to extend payments for 84 months, making monthly payment $537 which is more in line with the goal they had of a $500 per month car note.

It may seem like Buyer B comes out on top, but in reality, they’ll pay an additional $3110 in interest alone for their car – not to mention the three extra years to pay off their loan.

The uncomfortable truth is if Buyer B desires to come closer to a $500 monthly payment, they’ll need to either increase their downpayment to $15,000 OR search for a car that’s around $25,000.

Transparency in auto-buying is so critical. 

Monthly payments may seem like a no-brainer negotiation point, but despite what “feels right” or seems to fit within your preferred budget, your monthly car payment is not the complete picture when figuring out just how much your new ride will cost you. I think this issue deserves more focus. 

The truth is, it can be completely overwhelming to figure all this out once you’ve invested hours at a dealer test-driving and falling in love with the car. That’s why I recommend car shoppers use Auto Navigator from Capital One. It was developed to add transparency to the car-buying process by allowing consumers to pre-qualify for financing and see their financing terms before ever visiting a dealer. The user-friendly platform helps consumers build their offer by editing important factors like asking price, down-payment amounts, trade-in value, term lengths and more so you’re armed with the numbers that matter, saving you time when you visit the dealer. If you’re in the market for a new car – or even just curious about what kind of car could fit within your budget! – check out Auto Navigator today on the web or its iOS app and get the support you need. 

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