Car payments are a way of life for some people. A constant spend of several hundred dollars is added into the budget every month. It’s a vicious cycle: you buy a new car, as soon as you drive off the lot it depreciates 20% or more, and you make payments (and pay interest) for 36, 48, or 60 months. At the end of the loan you decide to buy a new car, trade in your current vehicle at significant loss, and hop back onto the bandwagon of car payments.
How to Avoid Constantly Making Car Payments
This cycle of auto loans will cost you thousands of dollars over your life time — I was in the same situation with a loan from Wells Fargo until recently. If you currently own your car without any financing or other lien on it, congratulations. Your goal is to keep this situation moving forward. Don’t take a step back and end up in debt again.
To avoid getting a car loan in the future, do the following:
- Drive your current car until the wheels fall off. If the car doesn’t need replacement, don’t replace it unless you are financially ready.
- Estimate when you need a new car. If your car is 10 years old, you need to start preparing for a replacement soon. If the car is 5 years old, you have a little bit more time to prepare. Estimate what year you will need to purchase a new vehicle.
- Estimate how much a new vehicle will cost at that time. Are you going to buy new? Used? Look at cars available today for your target vehicle to get a cost estimate. Even if you are off by a thousand dollars, you will be better prepared.
- Calculate monthly “payment” to yourself. Simply calculate a monthly payment based on the price of the vehicle and when you think you’ll need all the money. Put this “payment” into a special interest-bearing account earmarked for your next car. For example if you plan to buy a $12,000 vehicle in two years, you have 24 months to make payments. That comes out to $500 per month in savings.
- Repair your car until you’ve saved enough. If something happens to your car and your savings isn’t adequate enough to buy a new one, consider repairing your old car instead of taking out a car loan for a new vehicle.
- Buy a new vehicle. When you’ve saved up enough money and find a car that fits into your budget, you can choose to buy it. Or, better yet, keep the money and continue to drive yours until the wheels fall off, then buy a new vehicle.
- Continue making “payments” to yourself. Just because you purchased a new car doesn’t mean you should stop planning for the future. Plan out when your next car purchase will be and start saving up again — even if that next goal is 10 years away.
What if You Own a Car With a Loan?
Things are more complicated if you are currently owe money on your vehicle and making loan payments because you might not have enough extra money to save up for your next car. The best recommendation is to take care of your current car and pay down your debt as fast as you can. Once you are done with the loan, continue to make the payment to yourself into a savings account (see #4 above). Finally, do the best you can not to buy another car until you have saved up enough money to buy one outright.
Last but not least, you can make this strategy work better by buying a used car instead of a new one. You can buy an excellent used car at a significant savings off a brand new car. This will make it that much easier to buy the car with cash instead of having to take out another car loan.