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  • Writer's pictureRob Winkler

Your Car Payment Is Crushing You

Escaping the Car Payment Trap – A Guide to Financial Freedom We've all been there, haven't we? That nagging feeling that comes with justifying a new car purchase with those five words: "I'll always have a car payment." It's a common refrain, whispered in dealerships and pondered in driveway daydreams, but it's time to debunk this myth. Are car payments an inescapable facet of life, akin to taxes and laundry? The truth is more liberating than you might think.

Let’s delve into the inner workings of car payments and explore the alternatives before you drive away with that new car.

What Is a Car Payment? Imagine you've set your sights on a brand-new car, one that beckons you from billboards, TV ads, and your day-to-day commute. You're eager to make it yours, but the price tag is steep, and your savings account falls short. Like most people, you turn to financing. Soon, you're walking into the dealership, greeted by a smiling salesperson, and sealing the deal on that new car—a deal that includes a car note.

What's a car note? While often called a car payment, here’s the lowdown: When you finance a car, you're not the owner just yet. You're essentially borrowing money and pledging to repay the loan amount (plus interest) within a specified period. A car note, your monthly payment, is your commitment to this loan.

How Are Car Payments Calculated? Car payments aren't random numbers; they're carefully calculated based on several factors:

  1. The current price of the car: The sticker price.

  2. Trade-in value: The worth of your old car, if applicable.

  3. Down payment: Any initial sum you offer.

  4. The total loan amount (principal): What's borrowed.

  5. Interest rate: The cost of borrowing.

  6. Loan term: The number of months over which you'll pay off the loan.

It might seem complex, and that's precisely how car dealers and lenders prefer it. A convoluted process can lead to higher costs. Let's break it down with an example: Consider a $30,000 new car, no trade-in, and no down payment. You secure a loan for the full amount at a 4.09% interest rate (the new car average). Your commitment: paying $554 per month for the next 60 months. Even if you traded in your current car for $4,000 and put down $500, you'd still face a $471 monthly payment.

Dealerships might propose leasing as an option, but it's not the same as owning a car. While lease payments may be lower, you're essentially renting the vehicle for a fixed period. It's a costly way to drive a car, and you don't get to keep it.

How Much Is the Average Car Payment? Presently, the average new car payment is a staggering $729, while preowned vehicles come in at $528. The average interest rates for car financing are 5.07% to 14.18% for new cars and 7.09% to 21.38% for used ones. These figures are climbing, thanks to escalating car prices. However, the fact that these numbers are 'average' doesn't imply they are your best choice. Let's explore what these monthly payments entail in the long run.

The Real Cost of a Car Payment Remember that $30,000 car you bought (or financed, to be precise)? Over the five-year term you agreed to, you'll end up paying a total of $33,891. That's over $3,891 more than the car's original price—a significant discrepancy.

Consider another critical factor: the depreciation of cars. Despite the dealer's silence on the matter, your new car loses 60% of its value in the first five years. So, once the new car smell has dissipated, you've spent $33,891 on a vehicle worth perhaps $12,000. Worse still, if your car's depreciation outpaces your payments, you may find yourself grappling with an upside-down car loan—a financial quagmire.

The total auto loan debt stands at an astronomical $1.44 trillion, and auto loan interest rates keep rising. Yet, people continue to finance cars. Why? The belief that debt is the path to the 'coolest' or 'safest' ride has become the norm. But normal can be synonymous with financial instability. The good news is that there's a better way to obtain a car.

How Do You Get a Car Without a Car Payment? Having seen the shortcomings of car payments, it's time to introduce a superior alternative: purchasing a car with cash.

This may seem revolutionary, but it's an achievable goal for anyone. You don't need to be a millionaire to buy a car outright. Here are practical ways to own a car without incurring a monthly car payment:

1. Buy a cheap, used car: Abandon the idea of upgrading beyond your financial means. Acquire an affordable, used vehicle that gets you from A to B. If you can't write a check for the car immediately, it may not be the right choice. You could opt for a less flashy car to drive while saving for a better one. Remember, the car's primary function is transportation. Don't succumb to pressure to buy beyond your means.

2. Save what you would’ve spent on your car payment: Instead of making monthly payments, set aside the amount you would've paid for a car loan. After just 10 months, you'll have saved $5,540. Couple that with the $1,500 to $2,000 you can fetch for your old vehicle, and you'll have over $6,000 to buy a used car with cash. This represents a significant upgrade in just 10 months, without accruing any interest-related debt. By consistently saving the same amount, you could amass another $5,540 over the next 10 months. You can likely sell your current vehicle for a price similar to what you paid for it 10 months ago. This puts over $11,000 in your pocket to purchase a better car—just 20 months after embarking on this journey. In this scenario, you'd be winning against car debt with a score of 1 to 0.

3. Keep your current car and invest the money: If your existing car is fully paid off and free from major issues, why not continue driving it? It's an unconventional idea, but it can be financially rewarding. Instead of channeling funds into a car payment, you can invest that money in a reliable mutual fund. Assuming an 11% rate of return, you could amass over $120,000 in a decade. In 20 years, you'd have nearly half a million dollars. And over 40 years, that mutual fund could grow to more than $4.7 million.

These figures may seem overwhelming, but it all boils down to straightforward mathematics. The less you spend on your car each month, the more money you have for other vital financial goals, such as debt reduction, saving for your children's education, building your dream retirement nest egg, and more.

You Can Live Without a Car Payment! The idea of living without a car payment might not be as simple or glamorous as the advertisements make it seem, but with determination, financial discipline, and a touch of patience, your financial future could undergo a profound transformation for the better. In 10 years, whether you're grappling with monthly car payments or drowning in student loan debt, the weight of financial obligations can be lifted.

By following a proven plan to live debt-free, manage your money with confidence, and save for your future, you could find yourself in the position to pay cash for your dream car sooner than you ever imagined.

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