Since I am currently in the market for a “new” car, I thought I would share with you how I do not nor have I ever had a car loan. It’s quite simple if you start from the beginning but wherever you are in your auto ownership journey you can start at this moment and work your way up and out of car loans for good.
What’s wrong with car loans you say… isn’t financing a car the “American way"? Who doesn’t have a car loan? Well I don’t, for one, and I would wager a guess that every “Millionaire Next Door” doesn’t either. And yes, you’re right it has become the “American way” but which Americans are benefiting from that? Hint: It’s not you, the proud recipient of the car loan. It is the almighty bank (or sometimes the car dealerships) that are winning in this drive-now, pay-later arrangement. And the amazing thing is that they have you hoodwinked into believing that they are doing you a favor by getting you into the best car they can for low money down and easy monthly payments. Wow! What a nice guy… NOT!
Believe me, car dealers are not in the business of doing you a favor. The only thing they are interested in is their own bottom line. The biggest best car they can sell you lines their own pockets, and getting you to take a loan from them (instead of the bank) is just more icing on the cake. And if you have ever been car shopping lately you will notice that they (subtly or maybe not so subtly) will start touting the glories of leasing a car. This is like taking a car loan on steroids (for them). Think about it. You pay a down payment (maybe $1,000) and then “easy” monthly payments of $299/month, and at the end of the three-year lease you are out $11,764 and you own absolutely nothing! You can now either give the car back and start all over again or pay some exorbitant fee (on top of the almost $12,000 you’ve already paid) to now own the car. You could have bought a (used) car for $11,764 three years ago and still had plenty of life left to it for years to come.
And if you financed your car, let’s look at one example of how much you are actually paying for that car by the end of the loan period: If you take out a loan for $25,000 at 4.5% for a 60-month term, your monthly payments will be $570 and at the end of the term you would have paid out $27,364. A total of $2,364 lining the pockets of whoever held your loan. Nice! … For them. How do you feel about giving them all that “free” money? Would you like an extra two thousand in your bank account?
But, you tell me, “I don’t have the money to just purchase a car outright.” Well, I can tell you that on a modest income I have never taken out a car loan to buy a car. How did I do it? Well, I bought my very first car for cash and from that point forward I was saving the money (that most people are paying out for car loans) to purchase my next car for cash. Most of the cars were used, at least a few years old, but I did make the mistake of purchasing two of them brand new (all for cash). No loans. If you can afford car payments you can afford to save up for a car!
Now I have instructed my kids to follow my principles. They each saved up for their first car (with a little help from me at times) and bought them (used) for cash. Then I told them to pretend (like many of their peers) that they have car payments, but pay them to themselves. And now through the magic of online bank accounts it was easy for them to set up a “car account” with $200 or $300 a month being automatically deposited into it from their checking account. And with that very modest “car payment,” if they take good care of the cars they have, in 10 years-time they will have between $24,000 and $36,000 towards the (cash) purchase of their next car. And even more than that, really, because instead of paying interest to a car loan, they are making interest on their bank account. It may be only 2% at the moment, but it sure beats paying out at 4% or more!
But if you haven’t done that from the beginning and you are currently saddled with a car loan, then the best thing you can do is keep the car after your loan is up for as long as you can, and here’s the important thing: Keep paying those monthly car payments but pay them to yourself so that when you are ready for your next car you will have a chunk of change sitting there for your purchase.
And why do I say I made the “mistake” of buying a few of my cars brand new? Because the depreciation curve is enormous in the first year or two of car ownership and the bulk of that depreciation takes place in the first 5 minutes of car ownership. The minute you drive that sparkly new car off the lot you have dropped a couple of thou off its resale value. Ouch!! Let someone else take that depreciation (thanks first car owner!). Save yourself a couple of thousand dollars and buy a car that’s at least a year or two old.
So, now I will head out to the dealerships. You can buy a car from an individual for less money, but I like the assurance of having the dealer in case something goes wonky with the car a short time after I buy it. And even though I am paying cash I will still keep in mind that (friendly as they are) the dealer is not my friend.
I will do my homework and check out any cars I am considering online, for any issues and the prevailing price for that year’s model. You can try Kelly Blue Book or Edmunds for this info. Then I am prepared to bargain (with the mysterious “manager” in the back, that my dealer will be consulting). I may walk away from the deal two or three times before I am satisfied that I am getting a rock bottom price. Of course the dealer has to make some money on the deal. I don’t begrudge him that. I just want to feel that I got a fair deal.
Wish me luck as I head out in search of my next set of wheels and I hope you too will someday enjoy the joys of owning your own set of wheels without those pesky loans dragging you down.