Find out how to turn your current car loan into the last car loan you will ever have. It’s time to make a plan to eliminate car payments forever.
Car Payments are not a Lifetime Commitment
If you have an auto loan, you are not alone.
According to data from Experian, US Consumers carry over $1.2 trillion in auto loans! The average new car payment is $554, and for a used car it is $391.
But, car payments don’t have to be a lifetime commitment. You can break the cycle and eliminate car payments from your life, forever. You just have to hold on to your car for a bit longer than normal.
This does not mean that you have to drive an old, run-down, hunk of junk! You can evict car payments from your budget by just driving your current car a year or two longer than you would have anyway.
The first step to eliminating car payments forever is to be responsible when buying a car. That’s why I follow a car buying rule of thumb.
Car Buying Rule of Thumb: 20 / 4 / 10
When buying a car, the best way to keep your transportation costs under control is to find one that you can afford. That means not falling into the “how much do I qualify for” trap. Instead follow the car buying rule of thumb: 20/ 4 / 10.
- Put 20% down.
- Get a loan that is 4-years long or less.
- Keep the payments to less than 10% of your gross monthly pay.
If you have pretty good credit, then I would bet that you can qualify to spend more than this on a car. Don’t do it!
Pay off Your Car Loan As Soon As Possible
When you have a car loan, keep in mind that the monthly payments are the minimum payments. That means you are allowed to pay more! And, any additional money you put toward the loan goes directly to reducing the outstanding balance.
It doesn’t matter whether you followed the rule of thumb or if you spent more on a car. Either way, the best thing you can do is pay off the loan as soon as possible.
Cars go down in value. Having a loan on an asset that is decreasing in value is a dangerous game. So, get it paid off as soon as possible.
Sure, the bank said you could take four years to pay it off, but why not push yourself and get it done in three?
Keep Making Car Payments … to Yourself
The next step to permanently eliminating car loans from your life is to continue making payments to yourself, even after the loan is paid off.
I used to have a separate account that was just for car money. Every month I would transfer money into that account, just the same as I would have if I had a car payment.
But, recently, Ally.com upgraded their online portal, so I can allocate the money inside my savings account into different buckets. This allowed me to simplify and only have one savings account. Whether you have different accounts for different goals, or just keep track of buckets inside your accounts is up to you. The important part is that you are consistently saving part of your income for future purchases.
There are a ton of benefits to making payments to yourself instead of to a lender. If you miss a payment to a bank then they will tank your credit. If you make a habit of missing payments then they’ll show up and take your car. But, if you miss a payment to yourself, then the only thing that happens is you have to push your next purchase back by a month. No big deal!
Pay Cash for your Next Vehicle
After paying off your car loan and continuing to make payments to yourself, you will be able to pay cash for your next car faster than you think.
If you buy a car using the 20 / 4 / 10 rule, then you will have a fully paid-for car in within four years of purchase. If you keep making payments to yourself for two or three years, then you should be able to trade in your old car and pay cash for a newer car.
Let’s say you keep your car for seven years. You spend four years paying off your loan and three years making payments to yourself. We all know that cars decrease in value as we drive them, but even after 7 years, your car will be worth something. A reasonable guess is that your car will be worth at least a third of what you paid for it.
So, if you bought a car for $30,000, then seven years later you should be able to sell it for at least $10,000. I’d bet you could get more than that, but let’s be conservative.
That $30,000 car likely had a payment of about $500 per month. So, if you continued paying yourself that $500 per month into savings for three years after your car was paid off, then you would have $18,000 in savings ($500 x 36 months).
So, you can add $18,000 to your $10,000 trade in, and you can pay cash for a $28,000 car.
But wait, there’s more!
Because you are paying cash for this car, that means you don’t have to start with a loan. That means you can skip the first step of paying back the loan!
So, you have the option of continuing to pay yourself $500 payments, which will put you in a position to trade in cars again quickly. Or, you can reduce how much you are putting toward cars and focus on other priorities.
Personally, I like the second option. For most of us, cars are the biggest thing we purchase that goes down in value. So, given the choice, I’ll spend a little less on vehicles, so I can put a little more into things that increase in value. Like a Roth IRA!
Bonus: Lease Returns!
I know I didn’t touch on it in this article, but if you’ve read anything I’ve written, you know that I am not a fan of buying new cars. They just go down in value so quickly!
But, that doesn’t mean you have to drive a 25-year-old rust bucket. There are a ton of quality used cars available in all price ranges. And, I love buying lease returns: you get an almost-brand-new car for a significant discount.
Americans have a love affair with cars. For most of us they are the biggest purchase we make that goes down in value.
Not only do cars depreciate, but most of us go into debt to buy them. We spend a huge percentage of our income making payments on something that is decreasing in value every time we turn it on.
This is a vicious cycle, and I am not a fan. Having a car payment every month for the rest of your life sounds awful. And, there is something you can do about it.
1. Don’t buy new. 2. Keep it for a bit longer than the term of your loan. And, 3. Keep making payments to yourself.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.