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A Simple Guide to Budgeting Your Car Loan

Buying a car entails a significant investment, especially if you have other financial commitments to fulfill. It’s not always a one-time payment to settle the full amount, which most people can’t even afford. You might have to go for an auto loan if you lack funds and this entails a recurring interest payment.

As such, you should take a close look at your financial position before jumping into an auto loan. Your budget is crucial to maintaining your financial soundness after buying the car. If you are clueless about what to do, follow the tips below to budget your car loan in a pocket-friendly manner:

Break your income

To incorporate your car loan in your budget, the 50-30-20 rule proves quite useful. Take 50 percent of your income for your housing, transportation, and food, 30 percent for travel and entertainment wants, and 20 percent to meet credit and long-term financial commitments. Your car payment is a need, and it falls in the first category. Ideally, your car loan installments shouldn’t exceed 20 percent of your gross income.

Pay 20 percent down payment

There are two benefits of paying a larger down payment. Firstly, your creditworthiness with credit reference bureaus improve, and secondly, it reduces the principal amount, which in turn reduces the APR. If you pay a huge amount initially, you stand a high chance of enjoying considerable savings in the long term.

Consider servicing costs

Sadly, auto loan providers don't consider regular servicing costs. But you have to do so. Your car needs servicing every six months, and this could add to your monthly expenses. You should deduct the car-related expenses from 20 percent of your take-home income. This will leave you with the liquidity for meeting other expenses.

Consider insurance

Last but not least, you must get your car insured to avoid bearing expenses to repair damages from your pocket. You should consider the complete cost of the car, including initial costs and recurring expenses, along with how much you would have to pay as an insurance premium. Most auto loan providers provide auto insurance, but you can also do your online research to getting a better understanding of the scenario.


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