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!)