Creating a Budget to Prioritize Auto Loan Payments[yoast-breadcrumb]
Creating a Budget to Prioritize Auto Loan Payments
Owning a car can be extremely convenient for getting around, but those monthly auto loan payments can really take a bite out of your budget. Prioritizing your auto loan repayment is crucial for getting out of debt faster and regaining control of your finances. By following some budgeting best practices and strategies for prioritizing debt, you can make sure your auto loan doesn’t steer you off course.
Determine How Much You Can Realistically Budget for Your Car Payment
Before you can start budgeting for your auto loan payment, you need to figure out how much you can realistically afford. Financial experts recommend limiting your monthly car payment to no more than 10-15% of your take-home pay. This includes not just your loan payment, but also gas, maintenance, insurance and other car-related expenses.
To find your maximum budget for your monthly car payment, first calculate your monthly take-home pay. If you get paid bi-weekly, multiply your take-home pay by 26 and divide by 12 to get your monthly take-home. Next, multiply your monthly take-home by 0.10 (10%) to 0.15 (15%). This is the total you should budget for your monthly car payment and expenses.
For example, if your take-home pay is $3,000 per month, your maximum car payment budget would be:
- 10% of $3,000 = $300
- 15% of $3,000 = $450
So in this scenario, you would want to budget $300-$450 for your monthly auto loan payment and additional car expenses. This limit ensures your car costs don’t consume too much of your income.
Use the 50/30/20 Budgeting Rule
Another way to determine your ideal car payment budget is to use the 50/30/20 rule. This budget strategy recommends dividing your monthly take-home pay into:
- 50% for needs like housing, utilities, food, transportation
- 30% for wants like dining out, entertainment, vacations
- 20% for savings and debt repayment
Your auto loan payment would come out of that 50% allotted for needs. Limiting it to 10-15% of your total take-home pay ensures transportation doesn’t eat up too much of your needs budget.
The great thing about the 50/30/20 rule is it helps you balance your car payment with other essential expenses. You can play with the percentages to find a car budget that works for your lifestyle.
List Your Income and Expenses
Once you know your ideal budget for your auto loan payment, it’s time to look at your full financial picture. Make a comprehensive list of all your monthly income sources and expenses.
Be sure to include:
- Gross income
- Taxes and other deductions
- Take-home pay
- Fixed expenses like rent, car payment, insurance
- Variable expenses like utilities, groceries, gas
- Savings contributions
- Entertainment, dining out, etc.
This helps you understand exactly where your money is going each month. Once you have your income and detailed expenses listed out, you can start reworking your budget to accommodate your ideal auto loan payment.
Cut Expenses Where Possible
If your current auto loan payment is higher than what you can realistically budget, it’s time to find places to cut back. Look for areas where you can reduce spending, like:
- Call your auto insurance company and ask about discounts
- Eat out less frequently
- Cut back on discretionary shopping
- Downgrade cable/streaming packages
- Seek lower rates on utilities, cell phone plan, etc.
Even small cuts add up. If you can trim $100 from your budget, that’s an extra $100 you can put towards your auto loan principal each month. This will help you pay off your loan faster and reduce the amount of interest you pay over the life of the loan.
Increase Your Income
In addition to cutting expenses, increasing your income can provide more room in your budget for your auto loan payment. Options to earn extra money include:
- Ask for a raise at your current job
- Take on a side gig like rideshare driving, tutoring, freelance work
- Sell unused items around your home
- Rent out a room on Airbnb
Even an extra $200-300 per month can make a difference. Use that extra income to double down on your auto loan principal.
Refinance Your Auto Loan
If your auto loan has a high interest rate, refinancing can lower your monthly payment. Auto loan refinancing essentially means taking out a new loan with better terms to pay off your existing one. You’ll need a good credit score to qualify for the best refinance rates.
Start by checking your credit reports and scores so you know where you stand. Many credit cards and banks allow you to check for free. Then, shop around with multiple lenders to see what kind of rate and payment they can offer. Online lenders often have competitive refinance rates.
Run the numbers – if you can get at least 2% lower than your current rate, refinancing could pay off in the long run through interest savings.
Prioritize Your Auto Loan in Your Debt Repayment Strategy
Once you’ve optimized your budget for your auto loan payment, it’s time to make a debt repayment plan. Your auto loan should be high priority, since cars depreciate quickly. The faster you can pay it off, the better.
There are two main methods to consider when prioritizing debts:
- Avalanche method – Focus on paying off debts with the highest interest rates first, regardless of balance size. This saves the most money on interest.
- Snowball method – Focus on paying off smallest balances first, then roll those payments towards larger debts. This creates ‘quick wins’ that motivate you.
Since auto loans often have higher interest rates, the avalanche method usually makes the most financial sense. But don’t neglect smaller credit card or personal loan balances either – knock those out so you can put even more towards your car.
Automate payments for at least the monthly minimums on all debts so you don’t fall behind. Then put any extra money in your budget towards the auto loan principal to pay it down faster.
Pay More Than Your Monthly Minimum
One of the best ways to pay off your auto loan faster is to pay more than the minimum due each month. Even if it’s an extra $20 or $50, making additional principal payments reduces your overall interest costs.
For example, on a $15,000 loan at 6% APR over 5 years, paying just $20 more than the monthly minimum of $290 would allow you to pay off the loan 9 months faster and save $300 in interest!
Aim to put any extra money in your budget toward principal. Automate payments for an amount above your minimum to force yourself to pay extra every month.
Put Tax Refunds and Bonuses Toward Your Auto Loan
When you get a financial windfall like a tax refund or work bonus, resist the urge to spend it. Instead, use that extra cash to make a dent in your auto loan principal.
Making one or two large lump sum payments each year shortens your loan term. Plus, since the bulk of auto loan payments go toward interest early on, large principal payments make the biggest impact.
Even if you only get a couple hundred dollars back from your tax refund, put it straight towards your principal. Every bit counts when you’re trying to pay off debt.
Pick Up a Side Gig
Bringing in extra income from a side gig is a great way to generate cash that you can use specifically for debt payoff. Since the income is separate from your regular budget, you don’t have to worry about cutting back expenses elsewhere.
Things like driving for a rideshare app, tutoring students, doing freelance writing/design, or selling handmade crafts on Etsy can provide that extra debt-busting income. Even 10-15 hours per month could give you an extra $100+ to chip away at your auto loan.
Pause Retirement Contributions Temporarily
If you have expensive auto loan debt, it may make sense to temporarily pause retirement contributions like 401(k) or IRA until you pay it down. This frees up extra cash in your budget to put toward your loan.
However, this strategy requires caution – you don’t want to sabotage your future retirement savings. If you do pause, set a firm date to resume contributions, like 6-12 months in the future. Automate it so you don’t forget to restart!
Revisit Your Budget Frequently
As you pay off your auto loan, don’t forget to keep tweaking your budget. Every time your balance goes down, redirect those monthly payments toward other debts or savings goals.
Revisiting your budget frequently ensures you aren’t wasting money and you stay motivated in your debt payoff journey. Those auto loan payments can get put to good use elsewhere once you’ve paid off the balance.
Staying disciplined, making sacrifices, and taking strategic steps to prioritize auto loan repayments takes diligence. But it pays off tremendously in the long run through interest savings and a faster debt payoff timeline. The sense of accomplishment you’ll feel when you finally pay off your auto loan makes all the budgeting and number crunching worthwhile.