Much like a roof over your head, a car can be an indispensable necessity in your life. However, a car costs a lot of money. If you’re like most people, you’ll need to take out a car loan to help you finance such a large purchase. While there may be good deals to be had, there are also countless people out there paying far too much on their monthly car payment.
Are you one of them?
Key Points
- Car loan payments should be no more than around 10% to 15% of your gross monthly income.
- Before taking out a car loan, make a bigger down payment, extend the loan term, or even consider leasing to keep your monthly payments low.
- If you already have a car loan and want to lower your monthly payments, consider refinancing or trading in your car for a cheaper one.
Is Your Monthly Car Payment Too Expensive?
If your monthly car payments are too much for you to comfortably afford, they are too expensive.
Signs your monthly car payment is too expensive include:
- Your living paycheque to paycheque because your car expenses take up a big portion of your income (i.e. more than 10%-15%).
- You’re using your credit cards to make ends meet.
- You’re missing other payments and/or can’t save money because your car expenses take up too much of your budget.
What Is A Good Monthly Car Payment In Canada?
Your monthly car payments should fit in well with your current finances. That means you should look at your income and expenses carefully to determine how much car you can realistically afford each month.
Ideally, your monthly car loan payments and car insurance costs should take up no more than 10% – 15% of your gross monthly income.
What Is The Average Car Payment In Canada?
The average car loan payment in Canada for new cars is roughly $880 per month and $618 for used cars.
Learn more: What Is The Average Car Payment In Canada?
Monthly Car Payment Budgets: How Much You Should Spend On Your Car Payments?
Ideally, your monthly car loan payments and car insurance should leave you with enough money left over to cover other monthly expenses and have some flexibility to use whatever you have remaining on leisurely expenditures.
Here are two methods to budget for your car:
20/4/10 Rule
The 20/4/10 rule provides a guideline for budgeting car loan payments and works as follows:
| 20% Down Payment | Make a down payment of at least 20% of the vehicle’s purchase to keep loan costs low and avoid the possibility of becoming upside down on your car loan in the near future. |
| 4-Year Loan Term | Opt for a loan term of no longer than 4 years to keep interest costs low and pay off the car faster. |
| 10% Of Your Monthly Income | Ensure your total monthly car expenses — including principal, interest, and insurance fees — don’t exceed 10% of your gross monthly income. |
10% To 15% Rule
In essence, the 10% to 15% rule suggests keeping your monthly car payments to no more than 10% to 15% of your gross monthly income. This includes both your car loan payments and insurance costs. So, for example, if you make $6,000 per month (before taxes), your total car costs should be somewhere between $600 and $900.
The 10% to 15% rule in loan budgeting is focused on ensuring that you don’t overspend on a vehicle purchase. It also helps you more comfortably manage all your existing debts.
How To Calculate Your Monthly Car Payment?
The easiest way to calculate the cost of your monthly auto loan payments is to use a car loan calculator.
What Will Your Car Payment Be On A $20,000 Car Loan?
| Let’s say you finance a $20,000 car with a 5-year loan at an interest rate of 6%: Car Loan: $20,000Loan term: 5 yearsInterest rate: 6% Your estimated monthly payment would be $386.66. |
What Will Your Car Payment Be On A $30,000 Car Loan?
| If you take out a $30,000 car loan with a 5-year loan at an interest rate of 6%, your monthly payments would be as follows: Car Loan: $30,000Loan term: 5 yearsInterest rate: 6% Your estimated monthly payment would be $579.98. |
What Will Your Car Payment Be On A $50,000 Car Loan?
| Financing a $50,000 car loan with a 5-year loan at an interest rate of 6% would look like this: Car Loan: $50,000Loan term: 5 yearsInterest rate: 6% Your estimated monthly payment would be $966.64. |
Reasons Your Monthly Car Payment May Be Too Expensive
High car payments are rather common, and there are a few main reasons why this is the case, including the following.
You Got Stuck With A High Interest Rate
The terms of your loan can have a big impact on the overall cost of your car. Particularly, the interest rate and term length of the car. High-interest rates and short terms will generate the most expensive monthly car payments.
As such, it’s important to compare lenders and get pre-approved for a car loan to determine what your car loan payments may look like. This will also allow you to choose a loan offer that is most affordable for you.
| Tip: Your credit score often plays a key role in what your lender is willing to offer you in terms of loan amount and interest rate. To make sure that you’re getting the best interest rate on your car purchase, find out what your credit score is before you begin the car-shopping process. |
You Bought An Expensive Car
The higher the MSRP of the car, the higher the loan amount you’ll need, and the higher the monthly car payments will be. No matter how low of an interest rate you get, if the car price tag is out of your budget, your monthly car payments will be too expensive.
Considering how expensive cars are these days, it’s super important to do a little comparison shopping before you settle on the car that you eventually purchase. Not taking the time to do this research can cost you in the long run in the form of a higher ticket price and bigger monthly payments.
Learn more: What Is The Average Price Of A Car In Canada?
You Got Pulled Into The “Extra” Features
Similar to the car price, when you add up all the upgrades that are featured in the car, it could total tens of thousands of dollars on top of the base price. These upgrades will increase the loan amount required to finance the car, which will also increase your monthly payments.
Be sure you know what you want and be prepared to negotiate with your dealer.
Extras You Shouldn’t Pay For At The Dealership
To keep costs low on your vehicle purchase, be on the lookout for the following fees that dealerships may tack on to the final price. Then, kindly turn these extra services down:
- Paint Protection Fee
- Fabric Protection Fee
- VIN Etching Fee
- Extended Warranties
- GAP Insurance
Learn more: Are Car Dealerships Charging Canadian Consumers Hidden Fees?
How To Lower Your Monthly Car Payment When It’s Too Expensive?
Whether you already have a car loan and want to reduce your payments or haven’t yet committed to a car loan, there are a few effective ways to keep your payments affordable.
How To Lower Your Monthly Car Payment Before Buying A Car
The best time to negotiate a lower car loan payment is before you commit to a loan agreement. Keep the following in mind to ensure your car loan payments are as low as possible before signing a contract:
- Make A Large Down Payment – The bigger the down payment, the smaller the loan amount will be. That means lower monthly car payments. When buying a car, try to put down at least 10% to 20% of the purchase price to reduce your payments.
- Increase the Term Length – The longer you have to pay off your loan, the lower your monthly payments will be. For example, a $15,000 car loan at a rate of 4.5%, would cost $342.05/month on a 48-month term and $208.50 on an 84-month term.
- Look At All Car-Related Expenses – When calculating your monthly car payments, include all monthly car expenses, including the loan payment, gas, insurance and maintenance costs.
- Consider Leasing – While leasing is more expensive in the long term, it typically has lower payments than financing. This is because leasing only covers the vehicle’s depreciation throughout the term, while financing is based on the entire vehicle value (less the original down payment).
Learn more: Leasing vs. Financing A Car In Canada
How To Lower Your Monthly Car Payment After Getting A Car Loan
If you already have a car loan and are looking to lower your existing payments, consider the following options:
Refinance
Refinancing involves taking out a new loan and replacing your current auto loan with a new rate and terms. Ideally, the new loan will have a lower rate, which will help you pay less in interest overall and reduce your monthly payments as a result.
Or, you can extend the loan term to stretch out your payments. With more time to repay your loan, your monthly payments will be lower. Just keep in mind that you could wind up paying more in interest over the life of the loan by extending the term, even if your installment payments are lower.
Learn more: Refinancing A Car Loan
Speak with a Loans Canada representative today and learn how you can refinance your car loan and save. Call us today at 1-877-995-6269 or click here.
Note: Program is currently not offered in Quebec.
Sell Or Trade In Your Car For A Cheaper One
If your current monthly car payments are too expensive, consider selling or trading in your car and buying one with a lower price tag.
If you’re considering this option, make sure you can sell or trade in your existing vehicle for enough money to cover your outstanding car loan balance. Find out exactly what you still owe on your loan and how much your car is currently worth before taking this route.
Learn more: How To Lower Your Car Payment In Canada
Car Loan Payment Relief
If you’re struggling to make your monthly car payments, consider the following:
- Ask For A Car Loan Remodification – A car loan modification involves asking your current lender to adjust your loan payments to make them more affordable for you. The goal is to lower your monthly costs without replacing the loan altogether.
- Ask The Lender To Defer Your Car Payment – If you’re having trouble paying your car payment and need a short break to recoup your finances, consider deferring your car loan payment. Deferring your loan payments simply means postponing your payments for a short time. The length of loan deferrals usually ranges between 1 to 3 months.
Learn more: What Happens If You Can’t Make Your Car Payment?
Final Thoughts
Ensuring that your car payments fit well within your budget is crucial to maintain healthy finances. If you find that your car payments are too expensive, consider refinancing your car loan for a longer term and lower interest rate, or trade in your car for a less expensive one. If you haven’t yet taken out a loan, consider making a bigger down payment and giving your credit score a boost to make your loan more affordable.
