Man Showing His Car Some Love

Never Have a Car Payment Again (Even If You’re Middle-Class)

I’ve never had a car payment in my life—and, no, I don’t have rich parents, I’ve never inherited any money and, up until recently, I had a very mediocre income. I also have never driven a “beater.” In fact, all three of the vehicles I’ve owned so far have been on the newer side when purchased. I was just always determined not to borrow money for a car.

The Real Price of Looking “Cool”

When I see these young guys peeling past me on the freeway in their brand new sports cars, I shake my head. It’s usually some pimple-faced 19 year old sitting in the driver’s seat who thinks he’s the “big man on campus” or a good-looking 30 year-old in a new BMW who thinks he’s the envy of all who come across “his royal highness’s” path. It’s funny because I don’t envy them at all. Maybe—just maybe—the guy driving the BMW is a millionaire, in which case, he deserves to drive a luxury car. And maybe—just maybe—the pimple-faced teenager has really rich parents who bought him that car. But it’s much more likely that they both have car loans.

Are you falling into the trap of trying to look cool or like you have more money than you actually do by taking out a loan to drive a nicer car? Or maybe you feel like you deserve to drive a nice car because you “work hard.” The irony is, you’re having to work even harder to pay for something optional. On top of that, you’re actually decreasing your net worth in the long run. Feeling entitled or wanting to make others jealous can make you lose basic common sense.

Of course, none of us want to drive around in a clunker. That’s no fun. Driving a beat up “hooptie” can make us feel like crap—and feeling like crap is never a good thing either. And clunkers can be a real pain. They’re more likely to break down, are less safe and you will need to have them serviced more often, which will cost you time. I’m just talking about buying a safe, reliable car that looks decent versus the luxury car or ginormous SUV that will cost you an extra 20K that you don’t have to spare.

The Burden That’s In Your Driveway

Car loans are a ball and chain around your neck. It’s yet another payment you have to make on top of all the other bills you have. As of 2018, the average car payment was a whopping $530 for new vehicles and $381 for used. Wouldn’t it be nice to not have that extra payment? Think about how freeing that would be. You would have more financial wiggle room in your life and just knowing that would reduce your stress and up the fun meter.

Of course, most of us have to own a car for work and overall convenience so it’s not like we can completely get around shelling out money for a vehicle. But who says it has to be an expensive one? Considering the average amount borrowed for a vehicle is around $32,000, and that you can buy a decent car these days for about 12K, that’s about 20K too much. That’s a huge chunk of change that can be put to better use—in dividend stocks, for example. Simply put, borrowing more than you need is a stupid choice, not a necessity.

Let’s say you go for a less expensive car and manage to get your monthly car payment down to $200 a month and you take the $200 a month you would have been spending on a bigger car payment and instead, you save it. At the end of 5.75 years (the current length of the average care loan), you would have $13,800 saved up before any interest earned on that money. Now, let’s say you take that $200 a month and invest it in an account earning 4% annually. At the end of those 5.75 years, that $13,800 would have grown to just over 16K.

On the flip side is the interest you paid out for taking on the loan. Below is a calculation I did on Bankrate.com using the average car loan stats of $31,455 at 69 months and an interest rate of 5.17%:

True Cost of the Average Car Loan
True Cost of the Average Car Loan (Calculator from bankrate.com).

As you can see, you will have paid $4,973.91 in interest alone. This is yet more money that you’re throwing away and that could actually be avoided. If you plan ahead, you can always drive a safe, reliable and newer car and probably pay cash for it every time.

How to Switch From a Car Loan to Paying Cash

1) Get Rid of Your Current Vehicle If It Has a Large Loan

If you owe more than 5K and your monthly payments are more than $150 a month, you need to get rid of your vehicle. Do this as quickly as possible. It’s a noose around your neck. It’s actually preventing you from having more in life. You could work less, save up money so you could quit your job, spend more time with your family or just sleep better at night knowing that you had less debt.

If you owe less than 5K on your vehicle and your payments are less than $150 a month, then it might be worth keeping it. This small amount of debt and monthly payments is doable for the average consumer and shouldn’t have a great impact on your overall finances. But once your car is paid off for good, you need to hang onto it for awhile—and promise yourself that you won’t take out a large loan for a vehicle ever again.

Unfortunately, if you are upside on your loan—meaning, your loan amount is greater than the value of your car—you are in a tough spot. Your best bet is to try to sell it to a private seller who will take over your loan. You can usually get a higher price for a vehicle if you sell it privately. If the amount you receive is less than what you owe on your loan, then consider taking out a low-interest personal loan to pay off the remaining balance. As painful as it would be to take out a personal loan for a car you no longer own, doing this can help you “reset” your finances for the long term. Getting rid of expensive items you can’t afford will help improve your finances for the future.

2) Buy a Well-Maintained Used Vehicle

Never, ever buy a new car. According to carfax.com, the value of a new car can drop 20% or more after the first 12 months of ownership. After that, it’s roughly 10% a year. Buying a new car doesn’t make sense financially unless your Bill Gates. Always buy a car at least one year old. Let some other sucker take the 20% hit. (Then he can read this blog and realize his dumb mistake.)

Buy a cheap car you can pay cash for now, say, $6,000. Choose this car based only on three criteria: it’s reliable, gets good gas mileage and has a good safety rating. What it looks like can matter but it should matter the least. (And don’t worry about what other people think: You can laugh inside at them, knowing they’re foolish enough to throw their money away on car payments. Meanwhile, you are doing the smart thing and putting your money to better use.)

Don’t forget to negotiate the price. If you do your homework beforehand, you should know what a fair price to pay would be for the used car you’re buying. Check out kbb.com or edmunds.com for up-to-date information on how much a car is worth. I always look at what similar cars are going for in my areas as well. I managed to score really good deals on all three of the used cars I’ve owned because I found dealers who were desperate to get rid of the type of used car that I wanted.

Also, don’t forget to look at maintenance records and the car’s safety rating. This will save you time and hassle later on. Remember, life isn’t just about money. We all want the gift of more time and less hassle. Doing your research upfront can save you time and frustration from unexpected repairs and it could even save your life.

3) Start a Car Fund

Next, start a car fund. The money you save on not having a car payment goes into this special fund. Let’s say your car payment was $450 a month. In one year, you would now have $5,400. You can then sell the car you bought for 4K for close to that same price—let’s say $3,800. Now you can combine that amount with the $5,400 you’ve saved for a total of $9,200. You can buy a decent car with this amount.

Continue to add to your car fund until you reach the amount where you can buy a slightly used non-luxury sedan—something like a Hyundai, Honda or Nissan. This gives you a nice balance of having something decent to drive without having to borrow the money or wipe out your savings to do it. As soon as you have this car, start automatically saving for the next one that you eventually need to buy in the distant future. (Consider setting up an auto-debit from your main checking account that goes into a separate savings account for this car fund. $140 a month for 6 years will give you over 10K.)

I always plan ahead when it comes to funding a car purchase. As soon as I buy a car, I start saving for the next one. I know in the back of my mind that the car I just bought isn’t going to last forever. I even managed to do this when I was only making $35,000 a year.

quote: If you think nobody cares if you're alive, try missing a couple of car payments.

Hang On to Your Car Longer

If you’re changing cars 5 years or less, consider hanging onto your car longer. I hung onto my last two cars for 6 1/2 years each. I’m considering hanging onto my current vehicle for even longer if it holds up. Cars can last 150,000 miles or more these days with regular maintenance—and that is also a key: In order to hang onto your car for many years, you will need to make sure you stay on top of the maintenance. The time and money are worth it and it will save you much more in the long run.

Even if you can pay cash for a car, every time you buy one you’re paying sales tax, which can add roughly 2.9% to 7.25% to the price, depending on where you live. That’s money out of your pocket just because you want to upgrade you car. Also, the newer the car, the more you will pay in insurance. But if repairs are starting to cost you a small fortune, along with lots of your precious time, then upgrading to a newer vehicle could certainly be worth it.

What Kind Of Cars Would Be on the Road If Auto Loans Didn’t Exist?

I often wonder what kind of cars we would see if there was no such thing as auto loans. Without a doubt, there would be fewer luxury and newer cars on the road. In fact, some people would go from their amazingly luxurious BMW 5-series or Mercedes E-class—or even their Ford F-150—to a Hyundai Accent or maybe even a bike with a bent frame and a semi-flat tire.

We tend to think everything bigger is better and that seems to apply to our vehicles, too—bigger price tags, bigger loans and, for some, humongous cars that won’t even fit into an average-sized parking space. It’s up to us to stop this “more must be better” madness and not fall for the massive financing that the lenders are offering us. After all, super-sized car loans exist to help the companies that finance them get even richer—and they couldn’t care less if their loan keeps you trapped in a financial vortex.

Pimped out bike
Don’t borrow so much that one day, this becomes your ride.

Loans can be helpful in certain situations—like financing a college degree that will lead to a high-paying career or even purchasing a modest vehicle to get you to and from work. But there’s a big difference between borrowing 5K to have a means of transportation and the average 35K loan that is basically used to try to impress other people and make you feel “rich.” The problem with these giant loans that many dealerships are offering is that it can make us believe we can afford something “impressive” when really we can’t. (If you can pay cash for a luxury car without it making any major dent in your finances, then that’s different!)

When it comes to these monolithic loans, just say no. Then next time you go to buy a vehicle, don’t let the car salesman be too slimy by talking you into a vehicle that would cost you more than 5K in a loan. When he (or she) starts to show you an upgraded model with a bigger sticker price, just smile politely and say, “No, thanks.” Remember how it will feel when you can sleep at night knowing that you’re not carrying massive debt and can easily afford your lifestyle.

Choose Peace Over Impressing

When that idiot speeds past you in his new sports car with the 40K price tag, just smile again knowing that, while he may be flashy, you’re being smart. You’re choosing a better life, full of better decisions, instead of trying to impress other people. As I mentioned in my article, Stop Trying to Impress Other People and Get Rich Instead, you have to replace the desire to make others jealous with a stronger desire to become financially set. This has to become more important than having leather seats or that new car smell. (Get some new-car-smell spray and call it good!) Otherwise, you may dig yourself into such deep financial debt, you’ll be forced to trade in that “impressive” car for a much-less-impressive and much-less-practical scooter, complete with tassels and a silver, ringing bell:).