Faithful Finance: Is Your Car Payment a Mortgage?

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If you are in the market for a new vehicle, strap in for what I would call a “car mortgage.” According to a CBS News Report, an estimated 15% of new vehicle buyers could end up paying $1,000, or more, for a monthly car note. In the alternative, used car payments can range between $525 and $600 dollars per month. Imagine a family with two vehicles. These combined estimated monthly payments begin to rival the family’s rent or mortage.

Given this reality, we need a strategy to keep car payments down, and at a reasonable proportion of the monthly household budget. Here is some strategy:

Set Boundaries

Before purchasing a new or used vehicle establish how much you are willing to spend on your purchase. Purchasing a vehicle involves several considerations, including loan amounts, interest rate, insurance and maintenance. Depending on where you live and the model or brand of vehicle purchased, the average annual vehicle insurance cost is $1, 771, according to Bankrate. With regards to maintenance cost, the average American spent an estimated $10,000 in the year 2021 according to AAA.

Regarding maintenance costs, let us digress for a moment. For those who think $10, 000 may be expensive, consider that the average age of cars on the road is just over 12 years. In addition, the average vehicle owner is holding on to his or her for approximately 8 years. In other words, people are not changing their cars as often as you think. To help figure out some operating cost you could add up your monthly driving miles and divide that number by the vehicle gas mileage for a monthly estimated consumption cost. You can then multiply that number by the cost of fuel at your favorite gas station. Now that you have figured out some operating cost of that potential new or used vehicle, the last thing you want to consider is what your monthly operating travel cost would look like with an electric vehicle (EV). According to Kelley Blue Book, the average EV owner would add an estimated $56 per month to their electric bill, based upon the average household electricity cost of 16 cents per kilo-watt-hour.

Acquisition Considerations

How are you going to pay for this vehicle, cash or financing? Cash options are less likely now since the average cost of a new vehicle has increased at least 4.2% from last year. This makes the vehicle cost closer to $50,000.. But can you pay $50,000 cash for the vehicle, or are you going to finance the vehicle? If you are going to finance the vehicle, can you afford to deposit$10,000 or $15,000,  and finance the remainder?

The first thing you should know is that the interest rates available for financing used vehicles are usually greater than the rate for a new car. You may get rates as low as 4.00% for a new vehicle but your credit score will have to be outstanding, meaning a score of 780 or more. Currently, used car interest rates are between 6% and 7%. If you want to shop for auto loans relative to your credit score, you can try the Bankrate tool.

Start with attempting to obtain financing for your new vehicle with your credit union or bank. For a new car, you would have greater leverage if you walk into a dealership armed with your own financing. With your own financing you can turn down the dealership financing, which would most likely be greater than that of the credit union or bank. However, when it comes to purchasing a used vehicle, the dealership interest rate may be better than that of your credit union or bank. The dealership may not offer many warranties and perks for the used vehicle, but you may have some security purchasing a certified pre-owned (CPO) vehicle.

Finally, deposit as much as you can, which will reduce your monthly payment and may provide a lower interest rate on your loan. One of the equities you have to balance is the length of your vehicle loan. Avoid loans for seven years or more. Ideally, if you can pay off the note in three years that would be perfect.

The bottom line is that you don’t want to be upside down on your vehicle loan. What do I mean? The value of most vehicles depreciates so rapidly. Being upside down in your vehicle means that the length of your loan and the outstanding balance is greater than the value of your vehicle.

So, to recap,  purchasing a vehicle–new or used in 2023–carries much more significance and has greater impact financially than in times past. And, considering all this, a second takeaway should be that you don’t have to keep up with the Jones! Be yourself! Drive what you can afford and stay within your budget.

THAT’S WHAT’S UP!

Today’s what’s up is about tax refundS. This year IRS refunds are averaging $3,140 . It means that you should not start spending your refund before it is received. The second suggestion is that when you receive your refund you should fund your emergency fund, given that companies are making cuts and there is talk about a mild recession. Another option is to pay off your credit card and be prepared for the next turn in the economy. That’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2023. All Rights

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