Standard affordability rules are ‘impossible’ due to rising car payments
It is becoming increasingly difficult to rely upon the old rules of thumb to figure out how much you can afford for auto payments as car prices rise.
Saijal Patel is the founder and chief executive at Saij Elle. He stated, “We have so much people relying in rules of thumb, it’s impossible for them to use.” Yahoo Finance Canada In a telephone interview.
“It’s dangerous in my view to use them because it requires you to place it all in context.”
The personal finance world has a long-standing rule that vehicle expenses should not exceed 10% to 15% of your gross salary.
The 20/4/10 rule is another common affordability rule for buying a car. This suggests a downpayment of no less than 20%, a maximum term of four years for the car loan, and a monthly payment of not more than 10% of your weekly take-home pay.
Patel claims that the reality of ownership and purchase prices often exceed these rules. Therefore, it is important to look at a person’s financial situation in order to determine affordability.
She said, “I would not advise anyone to buy a car without first understanding their whole income, expenditure picture, and all other goals and needs.”
“My point is rule of thumbs – 9/10 don’t work. Every situation is unique and you must plan and prioritize when there are limited resources.
According to Finder.com, the average Canadian car payment is between $400 and $800. The average monthly payment for new vehicles is higher than the lower end. Add in insurance, maintenance and repair costs, and the monthly cost of a vehicle can easily exceed traditional car affordability guidelines.
Patel gives the example of a $45,000 vehicle purchase plus tax with a 20% downpayment. A $45,000 loan with three-percent interest for four years would cost $940 per monthly. Add $500 for maintenance, insurance, and gas, and you get $1,440 monthly.
A person earning $72,000 per year, or $4,273 per monthly after taxes, would pay 34 percent for the vehicle.
These are real numbers. You have rent, food and retirement savings. How can you make ends meet? Patel explained.
She said that clients should add up their monthly net earnings and fix expenses in order to calculate how much money they might have to contribute to a car.
How to Save on Car Payments
Patel advises that buyers can save more money on the downpayment or extend the loan for a longer period of time, particularly if the car is essential.
Patel advises buyers to carefully read all terms and conditions when a dealer offers promotional financing.
It is important to read the fine print regarding dealer financing options. You will be able to identify unnecessary add-ons and extra fees. Also, you will have a better understanding about the interest rate.
“Dealer’s are finding creative ways to attract customers. A popular strategy is the 0% financing promotion. Romana King, senior finance editor for Finder, said via e-mail that interest-free loans don’t make sense if you are constantly juggling bills and can’t afford to pay higher-interest debt.
She adds that a financing promotion could be a good option for people who are punctual in paying their bills and have the ability to quickly repay their loans.
“Just be certain you’ve done the math and are sure you can repay the loan (or a large part of it) within the promotional time to avoid heavy interest charges (and keep your monthly payments lower”), she stated.
King recommends that you arrange financing before you visit a car lot.
Buyers may also be able to search for vehicle models that are no longer in fashion.
“While inventory has been tight for the past few years, there are still makes and models that have fallen out of favor.” These out-of-favour models can be purchased at a lower price if you don’t want to hold onto just one or two models.
Michelle Zadikian, a senior reporter at Yahoo Finance Canada, is Michelle Zadikian. Follow her Twitter @m_zadikian.