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Home / Finances / How Does Everyone Afford New Cars?

 

Did you know that more than 15 million new cars are sold in the US each year? Considering that the country has a population of just under 314 million people, that means nearly 5% of the American population buys a new car each year! With the average retail of a new car exceeding $30,000, it is easy to wonder how so many people afford new cars. There are two general answers that we will cover. Read on through to find a quick tip to make sure that you do not exceed your budget when buying a car.

1. Long Loan Terms

In years past, the average new car loan lasted between 48 and 60 months. As a reflection of changing retail prices, some banks are offering loans for as long as 96 months. That means that borrowers are guaranteed to have negative equity in their car for at least four years. If they are in an accident, it is possible that their insurance will not pay off the loan on the car. If that happens, the borrower either has to pay the balance immediately or finance even more negative equity into their next car loan.

With longer loan terms a borrower must face the possibility that they will need to pay for major repairs while still repaying the loan. With some repairs totaling more than a thousand dollars, some borrowers may have to be late on a payment or skip one altogether just to get their car running again.

2. Sacrifice Other Areas

One of the major loan factors that a lender considers when looking at a loan application is your debt to income ratio, or DTI. In general, that cannot exceed 35 percent for a new car loan. It may stretch to 40 percent if you have excellent credit. DTI includes all recurring monthly payments, so how do some people afford a new car? They would rather drive a nice car than live in a nice home. Others may elect to go without a cellphone, cable, or eating out. Whatever it takes to find the funds to buy the car they want.

Monthly Vehicle Budgeting

Now for the tip. A car payment should stay close to 10 percent of your monthly gross income, but never exceed 15 percent. That may sound restrictive, but it will guarantee that you do not over-extend your budget. As an example, a person who makes $16 an hour and works a 40 hour week would have a monthly gross income of approximately $2,773. If they keep their car payment in the range of $277.30 to $415.95, their budget should not be stretched too far. At the same time, putting down 20% as a down payment and opting for a loan of no more than 4 years will make for the healthiest financing arrangement.

 

About the author: Jerry Coffey

 

Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.

 

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