Nov 15, 2023

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Want a New Car, but Not the Debt? Here's How

The amount you should spend on a car loan depends on your individual financial situation. Financial experts generally recommend that your monthly car loan payment should not exceed 15% of your monthly take-home pay. This figure includes the cost of the loan, as well as expenses like insurance, fuel, maintenance, and registration. It's important to set a budget that aligns with your overall financial goals and does not strain your finances.

As for the average amount Americans spend on car loans, it can vary widely based on factors such as location, income levels, and personal preferences. As of January 2022, the average monthly car payment in the United States was approximately $550.

There are 10 things about car loans that might surprise you:

  1. Negative Equity Rollover:

    Example: If you owe $15,000 on your current car but it's only worth $12,000, and you trade it in for a new car, the dealer may roll the $3,000 difference into your new car loan, increasing your total debt.


  2. Balloon Payments:

    Example: You sign a car loan with a balloon payment of $5,000 due at the end of the loan term. When the loan matures, you're required to pay this large sum, which could be unexpected if you haven't budgeted for it.


  3. Prepayment Penalties:

    Example: Your car loan agreement includes a prepayment penalty of 3% of the remaining loan balance if you pay off the loan early. If you decide to pay off the loan ahead of schedule, you'd be subject to this additional fee.


  4. Interest Rate Varies by Lender:

    Example: You're shopping for a car loan, and Lender A offers you an interest rate of 4.5%, while Lender B offers 3.9% for the same loan amount and term. Shopping around could save you money.


  5. Your Credit Score Matters:

    Example: With an excellent credit score, you qualify for an interest rate of 3.2% on a car loan. However, if your credit score is lower, the rate offered to you may be 5.5%, resulting in higher monthly payments and increased overall costs.


  6. Longer Terms Can Cost More:

    Example: You're considering a 72-month car loan with a lower monthly payment of $300, but the total interest cost over the life of the loan is $4,000 higher compared to a 48-month loan with a $400 monthly payment.


  7. Down Payments Affect Monthly Payments:

    Example: With a $4,000 down payment on a $20,000 car, your monthly loan payments may be more affordable at $250 compared to a $400 monthly payment without a down payment.


  8. Gap Insurance:

    Example: Your car is stolen, and your auto insurance pays out $15,000, but your outstanding loan balance is $17,000. Gap insurance covers the $2,000 difference, preventing you from having to pay it out of pocket.


  9. Used Car Loans May Have Higher Rates:

    Example: You're considering a used car loan with an interest rate of 5.2%, while new car loans are offered at 3.5% for a similar term. The used car loan may result in higher monthly and overall costs.


  10. Dealer Financing vs. Bank Loans:

    Example: The dealer offers you a car loan with an interest rate of 4.8%, but a bank or credit union provides a rate of 3.6% for the same loan. Choosing the bank or credit union loan can save you money on interest payments.

If you don’t want to take on more debt or face credit challenges. Car leasing could be a better option.

Here are the benefits of car leasing compared to car loans:

  1. Not Debt: Leasing is not considered debt and generally will not impact your credit score.


  2. Lower Monthly Payments: Monthly lease payments are often lower than loan payments for the same vehicle because you're only paying for the depreciation of the car during the lease term, not the full purchase price.


  3. Newer Cars: Leasing allows you to drive a brand-new car with the latest features and technology every few years. This can be appealing if you enjoy having a new car and the peace of mind of a factory warranty.


  4. Lower Upfront Costs: Lease agreements typically require a smaller down payment or even no down payment at all, making it easier to get into a new car without a substantial upfront expense.


  5. No Long-Term Commitment: Lease terms are typically shorter (e.g., 2-3 years), which means you're not locked into a long-term commitment. This can be advantageous if your needs or preferences change over time.


  6. Fewer Maintenance Costs: Since you're driving a new car with a factory warranty, many maintenance and repair costs are often covered during the lease term. This can reduce your out-of-pocket expenses.


  7. Lower Sales Tax: In some states, you may pay sales tax only on the portion of the car's value that you use during the lease term, resulting in lower overall taxes.


  8. Easier End-of-Term Transition: At the end of the lease, you can return the car, lease a new one, or buy the vehicle at its predetermined residual value. This provides flexibility and options for the future.

However, it's important to consider the potential downsides of leasing, such as mileage restrictions, wear-and-tear fees, and the fact that you don't own the vehicle at the end of the lease. You'll also need to maintain full-coverage insurance, which can be more expensive than required coverage on a financed car.

How can Restate Homes help with car leasing?

Restate Homes could be a smart choice to use to cover car leasing expenses. With Restate Homes, individuals have the opportunity to unlock the equity in their homes, providing them with monthly payments from Restate Homes, allowing them to cover expenses like car leasing. This alternative financing option can be particularly beneficial for those who may not qualify for traditional car loan or prefer not to accumulate additional debt.

Additionally, Restate Homes’ cost is dependent on your home’s value, which is inherently affordable. This means that if your home is worth more, you'll pay a bit more, and if your home is worth less, you'll pay a bit less. It also offers flexible repayment options. By utilizing the value of their homes to cover car leasing costs, individuals can potentially lower their monthly expenses and have more control over their financial future.


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