Money Management

Longer loan terms mean smaller payments, so why wouldn’t you want that? Keep reading to find out. 

Want to buy a car? Depending on what you’re buying, you might need to cough up a bigger chunk of money than you’re probably hoping. According to Kelley Blue Book, the average price for a new car was $48,808 as of March 2023, which was actually a decline of 1.1% from the month prior. KBB also found that in June 2023, the average used car went for $27,147. Unless you have a pile of cash waiting in your savings account, you’ll likely need to finance a car purchase.

You might not have a ton of money available every month to dedicate to an auto loan payment, and taking on a longer loan term (say, six or seven years) is one way to cope — if you get longer to pay the loan back, your payments will be smaller. But not so fast! A shorter loan term comes with solid financial benefits, if you can swing higher payments. Let’s take a look at why it pays to sign on for the shortest car loan you can afford.

You’ll pay less interest — in two ways

Shortening your auto loan’s term means paying less in interest. Of course, your total interest paid will be lower if you’re only paying that interest on the loan over, say, five years instead of seven (more on that below). But also, you might qualify for a lower interest rate altogether for a shorter loan. Banks and lenders vary, but a car buyer having fewer years to pay on a loan reduces the risk for the lender. Simply put, you may be less likely to default on a loan if you’re paying it for five years rather than seven. Lenders may be more comfortable extending you a lower APR if the loan will be paid off sooner and they’re taking on less risk to lend to you.

As far as cash savings, here are some numbers for you. Let’s say you’ve got a credit score of 700 (“good” for a FICO® Score), and have managed to snag an auto loan for a $30,000 new car at 14.09%, with 20% down ($6,000). According to U.S. News & World Report, this is the average new car loan APR for August 2023 for your credit score. Let’s take a look at how much interest you’d pay based on a few loan term lengths:

The money saved by going with a shorter loan (if you can cover the higher payments) is significant — over $4,300.

There’s less financial risk for you

If you’re paying for your car for fewer years before you own it outright, you’re less likely to end up underwater on the loan. This happens when you owe more money on the car than what it’s worth. If you intend to keep the car for many years, this may not matter to you.

But what if something happens to it while you’re still paying off the loan? If you get in a car accident and your auto insurer considers the vehicle a total loss, you’ll receive a check for the value of it. But if you still owe $15,000 on your $30,000 car, and your insurer says it’s only worth $12,000, you’ll have to come up with the remaining $3,000 you owe on the loan.

Once your car is paid off, you could save on insurance costs

Speaking of your auto insurance, you could save money on that by paying off your car sooner, too. Once the car is fully paid off and you own it outright, you can reduce your insurance coverage. Your lender likely required you to carry full coverage, but you have the option to lower your coverage to liability only. I don’t necessarily recommend this move, especially if the car is still worth a chunk of money, for your own financial protection — but it is an option.

Buying a car is a big financial move, and it’s certainly understandable if you can’t manage the higher payments that will come with a shorter loan term. But if you can, paying off your car sooner can benefit you in all these ways.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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Buying a home is one of the biggest decisions you have to make. Find out how much house you can afford with this helpful rule of thumb! 

Buying a new home is a significant financial decision that requires careful consideration and planning before you can get the keys. That’s why it’s essential to determine how much house you can afford before embarking on the home-buying journey. There are tons of rules and formulas for determining what you can afford, but one rule of thumb, in particular, stands out — the 8.71% rule.

What is the 8.71% rule?

The 8.71% rule takes into account the additional cost of homeownership, including property tax, maintenance costs, and cost of capital. The cost of capital is the opportunity cost of the down payment. Essentially, this refers to the cost of not putting your down payment money into other investments, like the stock market.

These three expenses make up the bulk of the cost of homeownership, and taking them into account is crucial in determining how much you can afford to pay for a home on a monthly basis.

The average rates for these three expenses add up to 8.71%.

Property tax (1.1%) + maintenance costs (1.00%) + cost of capital (6.60%) = 8.71%

This rule can also help you determine if it is better to rent or buy based on the costs.

How to apply the 8.71% rule to determine your home-buying budget

So, let’s break down the rule — if you want to figure out the total cost of owning a home on a monthly basis, you need to take the home price, multiply it by 8.71%, and divide it by 12.

For instance, if you have your eye on a $500,000 home, you can calculate the annual cost of homeownership by multiplying $500,000 by 8.71% (which gives you $43,550 per year).

Now, divide that annual cost by 12, and that gives you your monthly cost of homeownership: $3,629.17 per month.

So, what does this mean? If you want to make owning a $500,000 home financially feasible, you need $3,629.17 in disposable income per month in addition to your mortgage payment to afford a home. If you cannot afford to pay this extra amount, you might need to reconsider whether or not that house is within your budget.

Factors to consider when using the 8.71% rule

The 8.71% rule is a simple rule of thumb that can help you determine the maximum amount of money you can spend on your home’s monthly mortgage payment. It’s a quick and easy way to get an idea of what you can afford.

Additionally, the rule can help you save time and effort when you shop for homes within your budget, helping you avoid the disappointment of falling in love with a home that’s beyond your reach financially.

This rule can also help you determine if it is better to rent or own. If renting will cost you less than this amount, then it may make better financial sense to rent a home than to buy.

While the 8.71% rule can help you determine the maximum mortgage payment you can afford, it’s essential to consider other factors. This can be interest rates, tax benefits, capital appreciation, and your personal finances.

Buying a house is a significant financial investment that requires careful planning and consideration. The 8.71% rule is an underrated but useful tool to help you determine how much house you can realistically afford. By taking into account the hidden costs of homeownership, this rule can give you a realistic idea of what to expect from your monthly budget. It can also help you decide if it is better to rent or buy. Keep in mind, this rule is just a guideline, and your unique financial situation and preferences ultimately determine what you can afford. By following this rule or considering it a starting point, you can make informed decisions about your future homeownership plans.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Homeowners insurance premiums rose by double-digit percentages in 31 states. Find out how shopping around could help you lower your costs. 

I live in the South, and about 10 years ago, a summer storm swept in and dropped buckets of hail on our community. Thankfully, nothing was damaged beyond repair, but our insurance company came out, performed an assessment, and wrote us a check worth thousands of dollars for the damage it found to our roof and cars.

But increasingly, those insurance checks may be getting smaller for homeowners.

Insurance companies are simultaneously increasing premiums and reducing coverage as the insured damage from severe storms, wildfires, floods, and other natural disasters has exceeded $90 billion each year for the past three years, according to Wall Street Journal (WSJ) reporting.

Here’s why insurance prices are skyrocketing and why shopping for a different policy could save you money.

Why homeowners insurance prices are rising

When weather events do lots of property damage, it can cost insurance companies tons of money to make payouts to customers. To compensate for those losses, they often raise the price of homeowners insurance premiums and even cut back on coverage to remain profitable.

And since the past three years have been extra expensive for insurance companies, they’ve passed those costs on to customers. That’s making it difficult for people to find cheap home insurance. Here’s why home insurance is so expensive right now, according to the WSJ:

Insurance companies are losing money: Home insurance companies have lost money in five out of the past six years and are expected to have an underwriting loss through 2025.Companies are raising premiums to recoup costs: There have been double-digit rate increases across 31 states since 2022.Insurance deductibles are on the rise: To offset coverage of wind and hail damage, insurers have increased deductibles for these types of damages by 1% to 2%.Reinsurance premiums are climbing: Insurance companies buy insurance too, so they can protect themselves from risk. This is called reinsurance, and these premiums are up 33% on average. The steep rise in costs is sometimes passed onto home insurance customers.

Additionally, some insurance companies have pulled out of areas of the country — or reduced coverage — that are most at risk for severe weather, including California, Florida, and Louisiana. This can make homeowners insurance difficult to get and expensive to keep in some states.

Shopping around is the best way to reduce home insurance costs

With insurance costs on the rise and no indication they’ll come down, it’s more important than ever for homeowners to shop around to find the best homeowners insurance company. Here’s why:

Switching insurers could lower your costs: A recent Consumer Reports survey showed that only 13% of respondents regularly shopped around for new coverage. But when homeowners did switch insurers, 39% did so because they got a better price.Insurers evaluate homes differently: While all insurance companies factor in risk, they don’t assess property in the same way. You could get similar coverage from a different insurer but pay less for your premium and deductibles.Assess your current coverage: One way to lower your premiums is to assess your current coverage and compare it to what other home insurance companies offer. You don’t know if you’re getting a good deal if you don’t know what your current coverage is and how it compares to competitors.Your circumstances may have changed: When you first signed up for your home insurance policy, your insurance company factored in a lot of personal information, including your marital status, credit score, credit history, etc., in addition to the features of your home. If any of this has changed since your policy began, shopping around could help you find the right coverage for your current situation.

With the recent increases in severe weather damage, it’s a smart idea to take a close look at what your policy covers. Spending some time comparing different home insurance policies could help you get the right coverage at a more affordable price.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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