Most people think that owning a car means you’re going to be stuck with a car payment for the rest of your life. The auto industry is filled with enticing deals that allow you to stretch your payments over 4, 5 or even 6 years in order to get you into the luxury vehicle of your dreams on an average salary. It’s crazy!
Of course, I would advise against financing your car. Yes, interest rates are at record low levels. Yes, debt can be used as a tool to build wealth. But you are incurring bad debt when you take out a loan for a depreciating asset like a car. And bad debt is a big reason why so many people don’t have any cash at the end of the month.
There’s a simple solution to this of course. Paying cash for a car is the best option. For one, you won’t put your car at risk of being repossessed should your income dry up; however, the main reason I recommend paying cash for your car is the mental benefit of having low, fixed monthly expenses. When you have one less bill to worry about, it makes your life a lot less stressful.
Now, I recognize that coming up with $15k-$25k cash is not always possible. Even if you don’t have the cash to pay for that car, there is a way to break free of the never-ending car payment loop. Here are three, easy-to-follow steps to do this:
- Buy a used car – Or, as Suze Orman puts it, “a NEW, used car”. Did you know the moment you drive a new car off the lot, it can depreciate by 10%? That means if you buy a new car for $25,000, you could immediately lose $2,500 as soon as you drive away from the dealership. That also means your loan is instantly underwater (meaning, the loan balance is greater than the value of the car). Don’t be a victim of car depreciation, let somebody else take that hit. Buy a car that is 1-3 years old from a reputable dealership and you won’t have to worry about new car depreciation.
- Take out a loan no longer than 3 years/36 months – I’m not going to give a recommendation about a down payment, just make sure your car is paid off in 36 months or less. If you can pay off the car in 3 years with a small down payment, by all means, go ahead and do that. But don’t fall victim to the auto finance industry by falling for a 5 or 6 year loan. If you can’t afford a car payment on a 36 month term, you are looking at cars that are out of your budget. Setting a max loan term will by default determine what you can or cannot afford.
- Drive your car for 10 years – Certain brands of cars are built to last these days. The internet makes it easy to research cars to filter out the poor quality makes and models. I won’t give specific recommendations on car models, as I’m no car expert, but I’ve had great experience with Honda. Once you buy your car, get it serviced regularly. As long as you choose a reliable brand and keep up with routine maintenance and servicing, your car has a great chance of running for much longer than ten years.
To recap, buying a used car, paying the loan off in 3 years and driving your “new” used car for 10 years will allow you to break free of car payments for at least 70% of your life. This will do wonders not just for your cash flow, but for your mental health as well by reducing stress caused from high, fixed expenses. If you have any questions, feel free to message me!