How to Stop Having a Car Loan

How to Stop Having a Car Loan How to Stop Having a Car Loan

Car loans are pretty much a way of life in America.

According to CNW Marketing Research, 70.5 percent of people finance their cars. Seven out of ten.

Of the remaining 29.5%, 18.5% lease them and 11% pay cash up front.

So, seriously, when I say “way of life”, I’m not exaggerating. I recognize that writing a post about how to stop having a car loan is taking a risk, since odds are about 89% of my readers aren’t driving paid-for cars.

But after being car-loan free for the past five and a half years, I can honestly say, we never want to go back. No new car smell or fancy detail package would ever be worth the payments to us.

I know it’s not easy to break free from the car-note-cycle, but if you are ready to stop driving cars that the bank owns, here are some suggestions for making it happen.

#1. Do the math.

I’m a pretty unsentimental person. So for me, running the numbers and seeing the savings in black and white was all I needed to know to say “Bye bye” to the everybody-has-a-car-loan mentality.

When I realized that I could save just $125 a month (less than half an average car payment) and be able to buy a new (to us) car every 5-ish years (plus cover routine maintenance on our current car), I was completely convinced.

For me, doing the math made the decision clear as day. And once that decision was made – there was no turning back.

#2. Focus on what you’re gaining – not on what you’re losing.

If the numbers alone are too abstract to be motivating, then I suggest that you figure out what you can do with all the savings from not having a car payment.

Maybe it’s paying off your credit card debt. Or saving for your kids’ college tuition. Or saving more aggressively to retire with dignity. Or giving a big fat check to your favorite charity every year. Or paying for a trip to Disney World.

Whatever it is – you are saving YOUR money so that you – not the car dealership – gets to decide where to spend it!

#3. Remember that any debt equals risk.

It’s all too easy to justify a car loan to yourself. Not everyone is schlepping around $25,000 loans. For some, it’s just $2,500. Or $5,000. And the payments aren’t that much at all. And really – you can “afford” it… for example!

But the problem is that debt – any debt – is risk. Even if you can easily afford the $100 or $500 a month now, what happens if you lose your job? Or G-d forbid, someone in your family gets sick.

Income can go down as easily as it goes up. And if that happens — especially if the car loan isn’t your only debt — any monthly payments will suddenly become too many.

And what if you don’t have an income crisis? What if you just want to change jobs? If you have several hundreds (or thousands) of dollars in monthly payments, will you have the income flexibility you need to make the right choices for your family?

I contribute a small amount every month into our Car Replacement Fund. But if something comes up that month, we don’t HAVE to pay ourselves. We can redirect it to basics like food and utilities. Try doing that with an actual car payment!

#4. E”value”ate Your Possessions.

Dave Ramsey says that the total value of all things with wheels (cars and anything else motorized you might own) should not equal more than 50% of your annual income.

I’m clearly no Dave Ramsey, but I’d suggest an even more conservative percentage – like 25%, tops. Especially if you earn less than $100,000 per year and/or you drive a car(s) that is less than four years old. (Ours, by the way, is at about 12%, give or take a percentage point.)

You see, cars lose approximately 70% of their value in the first four years. Sure, some cars hold on to their value a bit better than others, but when you’re looking at losing $100 in value each MONTH during the first four years of ownership, you need a pretty hefty income to support that kind of constant loss.

#5. Separate your wants from your needs.

One of the biggest upgrades that gets people into car debt trouble is going from sedan to minivan. The “we need” a minivan is a pretty clarion call among growing families.

But do you need a minivan with two kids in car seats? Absolutely not. Will it make your life more convenient? Sure. But it’s not a need.

It’s not even a need with three kids. If you can’t fit your current car seats across the back, get new seats. Trust me – three new car seats will be a lot cheaper than upgrading from a sedan to a van. The difference in gas mileage alone will probably pay for those three seats in the first year of owning a van.

Then there’s the “I need a fuel efficient car” thing. Sure, getting 40 miles to the gallon is fab and a huge money saver, if all else is equal. But if you’re driving a finally-paid-for-car and thinking about taking out a loan to buy a hybrid, all else is not equal.

I’d even encourage two (or more)-car families to examine whether they really “need” two cars. If you could drive one paid for car or two mortgaged cars, I think you have to look seriously at how much inconvenience your family can withstand. It’s not forever. It’s only for as long as it takes to save up again for that second car.

The cold reality is that getting rid of your car loan is more than likely going to require you to downgrade your carstyle. But  just think how much you’ll be able to upgrade your lifestyle without all those payments!

#6. Sell now or pay it off — fast.

Once you know you want to live without car loans, it’s time to put that desire into action. You have two choices:

1. You can sell your car and take whatever profits you get and put them toward a paid-in-full new-to-you car. If I had car debt, this is what I’d do. In a heartbeat. Even if I could kill that loan in a just a year, I don’t think any car is worth that. But I know I’m pretty hard-core on this, so you do have another option…

2. Get crazy intense about paying off your car loan. Make double, triple payments every single month. Even if you have five years left on your loan, consider your new loan term to be a year – 18-months, tops. If you can’t be free of that note in a year and a half, I’d strongly encourage you to sell.

As I said when I started this post, I know that saying you can and even should live without a car loan is pretty “counter-cultural”. And my suggestions for how to get there may be even more bombastic. That’s why I’d love to hear from you.

What do you think about car loans? Are they “bad debt” or “good debt”?

If you’ve always had a car loan, do you think it’s possible to live without one? Have you recently made the switch to being car-debt-free? Will you ever go back? 

(This post originally appeared on February 15, 2012. I’m reposting it after a great budget coaching session in which my suggestion to drive a $1000 used car for the time-being rather than taking out a car loan was met with disbelief. I think I might have convinced the husband by the end, though!)

Comments

comments

Comments

  1. There was nothing so liberating as when I finally paid off my minivan after 5 years of payments. I drove the car payment-free for another two years, all the while itching for a new car, but talking myself out of it. When my son totaled the minivan, my decision was made for me. I financed a new car, and I have about 3 years left…then I plan on holding on to this car for as long as I can.

  2. I am not sure how this factors in, but I don’t want a “new to me” car every 5 years. I’d much rather have a super reliable car for a very long time. When I got my first job, I bought a Honda Civic, and I kept that car for 13.5 years! (I recently sold it to my brother, so it stayed in the family…) I enjoyed 10 extra years with that car, with only minor repairs, after I finished my car payments.

    I’ve read Dave Ramsey’s books, and while I agree with most of his ideas, I can’t wrap my head around this one. If I were to buy a used Civic for $10K in cash every 5 years, I’d have spent more than $20K in cars, and be saving for the next one.

    I guess I felt like the best choice for me was to buy another new bottom-of-the-line low-end car (around $18K), specifically because I have the intent to keep it for another 13+ years. When my young kids are old enough to drive, we can pass it on to them, and know it was maintained well. When I made this decision, I looked at used cars, but decided that if I had bought a 3-5 year old car now, while it would have been a few thousand less, it would last fewer years as well.

    I am curious about your thoughts on this…

    • I hear what you’re saying, but IMHO the depreciation of the car alone makes new the less prudent choice.

      We have a 2000 Camry with 140,000 miles on it and a 2004 Odyssey with 150,000 miles on it. Per KBB, we’d get around $4200 for our Camry (private sale) if we sold it today. So, even if I turned around and spent $10K on another car, I’d really only have $5800 out of pocket expenses.

      Let’s say – and these are very rough numbers – that your new-off-the-lot Civic costs $20K, you drive it for 12 years and you sell it for $4K when you are done with it. So your total cost would be $16K. But if you had a loan on that car, your total cost would actually be much higher, because you’d have paid around 9% interest for, say, 60 months. So, in fact, that $16K would be more like $21K (since you’d pay about $4950 in interest over the life of the loan.)

      Now let’s say you routinely pay cash for your cars. You buy a 6-year old Civic for $10K (most of the depreciation happens in the first 4 years) and you drive it for another 6 years. You sell it for the same $4K when you’re done. Now you buy another 6 year-old Civic for $10K, but you have $4K to apply to it. You drive it for six more years and again, sell it for $4K. Your total cost of ownership is only $12K – roughly 45% what you would have paid to buy it new with a loan.

      Again these numbers are extremely rough, but I think they illustrate the huge hit that depreciation takes on a car. Plus, of course, the increased cost of having a loan.

      If you pay cash for the car, whether it’s new or used, I still think used is the better deal due to deprecation. But it does even the score a bit ($16K vs. $12K).

      • Thanks for your response… I think car buying becomes an emotional decision, and you’ve made it a really logical argument here.

        One thing to consider is the low interest rates available on new cars – both of my car loans have been at 0.9%. I do try to pay off the loans quickly – this time I had a much larger down payment since I planned the car purchase in advance.

        I am also curious about selling used cars – if you sell a car to a used car dealer, you never get the KBB price, and I don’t know how comfortable I feel selling a car by myself. Is it really possible to get the KBB suggested price?

        Thanks for having this conversation with us!

        • You are so right about the emotions involved in buying a car. I’m notoriously unemotional about this stuff – some might call it a fault ;-)

          The car dealers definitely rip you off, both as a buyer and a seller. I do think it’s possible to get close to the suggested price, but you definitely need to have patience (again, as a buyer or a seller). It also depends on your market – some are better for used sales than others.

      • Mara, you are not taking into account maintenance costs here. Maintenance costs for a car in the first four years are lower than afterwards, and could easily make up the $4k difference you give here. Also there are economic arguments for why you should never buy a used car because essentially, they will always be lemons: http://www.slate.com/articles/arts/the_undercover_economist/2006/04/if_life_gives_you_lemons_.html

        Similar to Adina, I drive a 2000 Honda Civic that I bought new with cash. I’ll pay cash for my next car (guessing somewhere in the next 2-4 years) too since I haven’t had to make one car payment in 11 years. I would encourage everyone to do that, I just don’t believe that buying used makes sense.

        • Thanks for adding this, Erica. This is what I was getting at – if I am going to own a car for 13 years, I’d rather own it for years 1 through 13, rather than years 3 through 16. What I save at the beginning (by buying it used) I’ll spend later on in repairs.

        • they will not always be lemons. this is from the owner of three excellent used cars we have found reliable and inexpensive to maintain, our most extreme example being an attractive Saturn going well at 419,000 miles. it seems strange to bet against yourself when buying new guarantees a certain higher cost even if it works well, when high maintenance costs for a used car are not guaranteed even if the likelihood goes up over time.

          • Mara Strom says:

            Good to hear, Holly! We’ve had similarly good experiences with our 100,000+ mile used-cars!

      • Mandy Tirado says:

        I hear what you’re saying about your cars, but as a wife and a daughter of mechanics, I would NEVER (not shouting, just can’t italicize) pay more than $2000 for ANY car with more than $100,000 miles on it, especially a mini van from a family with multiple children. It’s just not a smart buy for many reasons. You’d be hard pressed to find a prudent, financially responsible person paying KBB value on that car. It’s ridiculous to expect that, without having taken advantage of someone. I ONLY say this because I want readers to be responsible about what they choose to buy. KBB values are a guideline, but you should generally never, ever, ever buy a car with more than 100,000 miles on it, unless you’re only planning on keeping it a few months, or…like me…you have highly qualified mechanics in the family with more than 60 years experience between them. And the way newer cars (after 1980) are made these days, you should ALWAYS be wary of purchasing a used car with a lot of miles on it.

    • Late to the discussion but I’ll add my $0.02. We’d love a minivan for carpooling but we just can’t seem to make it work financially and we just don’t carpool.

      As for cars, I’d suggest looking a “new” car that is dealer used. The last car we bought was a camry that I paid $17K for when list was I think $23. It had 5,000 miles on it and some dings and dents from having been used by the dealer as a test car or one of the employees driving it. It had never been titled. It seemed like a good compromise on the used vs. new. I’ve driven it for 6.5 years and have 100,000 miles on it and hope to keep driving it.

  3. For five years, we had one car. We both worked from home, and it was an occasional inconvenience on a Sunday. There were about 2 times in those 5 years where we knew ahead of time that we would need to cars for a specific reason for a day, so we rented. There were other times when we had free use of someone else’s car on an as-needed basis — or, for example, for the summer, when friends were away staffing summer camp.

    Now we have two cars because one is offered as a work benefit. I won’t sob hysterically about the fact that we sold our fully paid for Odyssey (which I only purchased new because I planned to drive it until the wheels fell off…) and paid cash for a lesser, used Sienna, brought it to Israel, and then paid another $15k in taxes. SOB. (Sorry.)

    Anyway, yes. One car is possible. And I’ll never buy new again either. Or, more accurately, I will never allow my husband to buy new again.

  4. My cars speak for themselves: We have a ’95 Caravan, a ’97 Le Sabre, and a 2000 Honda. We just bought the Honda a few months ago because my husband drives a lot for work. My two older kids and I share the other two cars. I bought the Caravan new when my twins were little and took 5 years to pay it off. Never again! While it has lasted me a long time, it depreciated quickly, and I would have been fine with a used car. We’re planning to drive all of these as long as possible. Would it be nice to have a shiny newer car? Yes. But I can handle these and put my money elsewhere. That’s my priority. I took my Caravan to the mechanic yesterday because I need to drive to a nearby small town and wanted to make sure everything was OK–it cost a total of $26 for the inspection and to top the oil off. (I DO have a GREAT mechanic.) I would also add that my car insurance is so much lower on the two older cars than the newer 2000 car. With so many drivers, that’s a big deal also.

  5. YaelAldrich says:

    Are some minivans still hard to fin used? When we were in the market for our first new car (in ’05), I tried to find a used Sienna or Odyssey. There were none from Maine to NY for several months. We came into an inheritance so we ended up purchasing a brand new Sienna two days before Hurrican Katrina hit NOLA (which was where we moved to)! We call that car our “teva” (ark)! Several not-my-fault accidents and one vandalism later it is going strong. If we need a second car in a year or two (if we live la vida mega-commuter), I will try to persuade my DH to buy used but the new car gimmes are strong!

  6. Mara, I think that car loans are sometimes a necessary debt but one that we should seek to eliminate as soon as possible. Here’s my story:

    When I graduated from college, I received the gift that each of my siblings did upon the same achievement: the title to a car (NOT new by any means) and 6 months of paid insurance. What a gift! I drove that car for eight more years, but it never occurred to me to set aside money for a new car. Even when my car started dying slowly but surely, my brain wasn’t in the right place to plan for the next one. I just wanted to eke every last day and mile out of my car. And I did. This was clearly before my KOAB days!

    When my car reached the last of its nine lives, I went to a dealer and bought a used car. I use the term “bought” loosely because I financed 100% of it over five years, and let’s not even talk about the horrific interest rate due to my poor credit. This was the only way I could get a reliable car that I *did*need* to get to work. So I started paying on the car and from the very first payment, I went above the minimum. This car, I decided, would be my personal redemption from bad credit experiences. When my finances have improved, I have increased my monthly payments, and I am now pushing all windfalls toward the principal. If we continue at this rate (and we will!), the car will be fully paid off this fall–more than a year in advance. I’m pushing for even earlier if we can do it.

    The big question in our mind is what happens to the money that went toward a car payment each month? Previously, I was determined to snowball it toward student loan debt (seriously, a second mortgage–and we don’t even have a first mortgage). Now, I wonder if it should be split between student loan debt and savings for the next car that we will eventually need. I would love to hear your thoughts on that!

    • Depending on the type and amount of loans you have, you may be better off directing your cash and savings towards other goals. Many student loans offer lower interest rates and more flexible repayment options than any other debt or expense you will have. Cars depreciate rapidly and can be repossessed (if financed). I am possibly going to come into some money soon and I’d like to use that influx to pay off my car (I financed). Right now I can definitely afford my monthly payment, but I would feel much better without that debt hanging over my head.

      • Good points. I want to get the loans with the highest interest rates paid off first. The monster loan has a very low fixed rate of under 2.5%, but with a monster loan, that’s still a lot of interest each year. My goal is to pay the higher (and variable) loans first and then push everything I’ve got into the biggie.

  7. We have not had a car loan in five years. It has been great! Unfortunately, we are looking at having to finance a new vehicle (or two!) because although we’ve been saving, it’s not nearly enough to pay cash. Our car is at the point where we have to decide whether to pour more money in for repairs, not knowing how much longer it will last (17 yrs old, 150,000 miles). At the same time, our Windstar does not have enough shoulder belts for our family. (In hindsight, it would have been better to spend more money up front on a Sienna or Odyssey that would last through more kids.)

    One option we are looking at is taking cash out when we refinance our mortgage, to buy a new (to us) vehicle. Opinions on that?

  8. The biggest risk of buying a new car with a loan is that if that car gets in an accident in its first few years and the insurance determines it has been totaled, you will OWE more on the loan than the insurance will pay for the car! So if you HAVE to finance a car, it really is better to finance a used car.

    Now, personally, I like the idea of buying a car new and keeping it for years and years because then I know how it has been maintained. Buying a used car from family or friends also works and is really the best method. It’s helpful to have family that has the “new car every few years” bug for this! Our general agreement is that we pay whatever the dealership will give for trade-in (which is how we bought a 3yo Prius for $13,000! Granted, I only got 15 minutes to decide and we weren’t in the market for another car, but it wasn’t an opportunity to be passed up).

    It’s also really important to keep good records of car maintenance costs. When you have an older car, it seems like every time you take it to the mechanic it costs at least $600 – $1000. Which then makes you start thinking you need a new car. But when you go back over the past 5 years, for example, and add up all those expenses, and then divide by those 60 months, you realize that repairs have only been costing you about $150 a month — which is WAY less than a car payment!

    Finally, it’s extremely important that you have a mechanic you trust, and particularly trust to tell you what does NOT need to be fixed immediately and when the car is not WORTH fixing. For example, we have an 18yo Subaru with 197,000 miles on it. We only fix those things that 1) are a safety hazard if not fixed now, and 2) will cost us more to fix later. Some things will just get worse and worse, and finally break, and cost just as much to fix at that time as they would have earlier. And since at any point, the car could completely die (and not be worth fixing), I don’t want to put money into it that doesn’t need to be there. When I took in our 12yo minivan because “the brakes felt weird”, I expected it needed new brakes. Instead, it needed a $2,300 *part* for the ABS system, and my mechanic said she wouldn’t even tell me how much the labor would cost because she couldn’t recommend fixing it — the car was not worth risking that much investment. Off to the scrap-heap it went, and I was so thankful that I had a mechanic I could trust to tell me when it didn’t make economic sense to fix it.

  9. I’ve seen the “any debt is risk” argument before. I’ll grant that I can see some truth to it, but I think it’s ignoring the converse. If I have a car loan, which I do at no interest due to a dealer promotion a few years ago when I bought it, then yes, I owe a certain amount to the car company each month. I also have several thousand more in savings than I would if I had paid in full upfront. In my case, I’m earning meager interest on that money at no cost to me since I’m paying no interest. More importantly, if some unforeseen problem should arise, I can use those few thousand dollars for important expenses while, best case, borrowing car payments from family (it’s easier asking for a few hundred dollars than a few thousand, right?) at no interest or, worst case, falling behind on my car payments. During that time, the bad situation may be solved (say a new job is found) and we pay off the back payments and, if not, we sell the car and downsize, pay off the back payments, and while we’ve lost the car, we’ve kept our home and replaced the car with a cheaper one. If we paid it all upfront, we don’t have that flexibility. Admittedly, though, that’s just my understanding, and having never fallen behind on any bills or loans, I don’t necessarily understand the details of falling behind and catching back up.

    • I don’t disagree with your point when there are such low interest rates, that having the flexibility you describe can be a benefit. The real risk I see, is if the car were to be totaled (accidents do happen) in the early years of a new car loan, you are likely to owe thousands of dollars more on your loan than the insurance company will pay out, so you not only have to start over with buying another car, but you have to pay off that difference between what you owe and what the insurance check will cover.

      Similarly, if you were to need to “sell the car and downsize”, you are unlikely to get as much for your 1-2yo car as you still owe on it, thus the selling it actually COSTS you money.

      Now if you can get a really good low interest loan on a barely used car, you shouldn’t have those problems, since theoretically you can sell it for close to what you bought it for, unlike with a brand new car.

  10. We haven’t had a car payment on either vehicle for many years, but your post has made me realize that we really need to add a line item in our monthly budget for car expenses- for repair and replacement. Thank you!

  11. I think it’s also important to do a* lot* of research before buying any car. We chose to pay a bit more up front for our Volvo wagon and Odyssey because we knew our repair bills would be minimal. Our first car together was a Ford Taurus and it was a horrible money pit – never again. We haven’t done more than the most basic maintenance in 5 years and the vehicles run great.

    THANK YOU for pointing out that you don’t need a minivan for 3 kids. I hate minivans and did not want one. When we found out we were having twins, everyone told me we’d have to get one. I was determined to avoid it, so I took the 3 carseats to the dealership and installed them to make sure they’d fit. I was 8 months pregnant at the time and actually drew a crowd. We had to get a minivan when I had #4, but I plan to downsize as soon as possible to a crossover (you can’t reach the 3rd row in a crossover with an infant – I would have had to put the baby in through the trunk and yes, I found this out through experimenting at the dealership lol).

    • Mara Strom says:

      Glad I’m not alone! We like the van for trips and carpooling, but if we couldn’t afford it, we’d make do with a sedan in a heartbeat. I’m also totally LOL at the image of you testing the carseat installation with an 8-month pregnant belly!

  12. Hi Mara,
    We just finished paying off our second car and are super excited. We are in the debt snowball phase right now so how does that work in terms of saving for another car?

    • Mara Strom says:

      YAY, Rivky! You’re doing great! As far as your question, I guess I would try to keep my intensity for debt repayment at the maximum until we got done with the snowball. However, if I had one car that was about to die, or knew that some other imminent, necessary expense was coming up, I would press pause on the snowball and pile up a savings to deal with that issue. The first goal is not to add to the debt load, the second is to eliminate it all together. Does that make sense? HTH!

  13. Well we’re partly in the 11% LOL – my car was paid for up front – as was my last car [that we drove till it was costing more to keep]

    We’ve learned my husband is better of leasing – car is important to his work, takes a pounding as he’s driving all the time, and has to look fairly good. So we lease it and he deducts his miles so it works out to be a decent deal

    But I remember car loans and how much they weighed in my brain – hated them.

    • Mara Strom says:

      Welcome to the 11% club! My accountant actually talked to us about a lease, but I told her we don’t drive enough for work (which is true), plus, she knows I get itchy just thinking about anything with payments.

  14. So my hubby and I decided after out last loan several years ago that having no loans was more important to us (we’ve managed to have no house payment or car payments). Part of it for us is still getting a car that is reliable, but what we want. We both want a safer vehicle for our small people, which to us means a larger vehicle. (I know there are safe enough cars, but it’s an immovable point for us.) We usually use our tax return to help us purchase what we need. I still have my little car from high school (paid for many moons ago) which I drive to work and out two “in-our-eyes-approved children safe vehicles.” It’s wonderful to not have to worry about changes that happen to us along the way that will affect our finances! I applaud your post! I hope more people consider living this way!!

Leave a Comment

*