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Back in 2008 I made the shittiest financial decision of my entire life.
I bought a brand new car. Gasp!
No big deal right? Wrong. Not only was buying a new car a terrible idea, I also had pretty terrible credit at the time which landed me an absurd 18.45% APR car loan.
That’s like buying a car with a friggin’ credit card!
After six months of payments I was able to refinance with a less predatory lender at a more reasonable 9% rate. Still horrible, but it pushed me to pay it off as fast as possible.
Before the end of 2010, I had completely paid off the vehicle, and dropped the insurance coverage to liability.
Next time you’re out, take note of what vehicles other people are driving. Odds are you’re going to see a lot of shiny new cars, trucks and SUVs that are probably less than 3 years old. The crazy thing in, 73% of vehicles on the road are financed.
The average cost of a new car these days is right around $30,000 and the average interest rate for financing a vehicle is 2.678 %. If you assume a $5,000 trade-in, a 5% sales tax and a 60-month term then you are looking at a nice monthly payment of $445.65.
Federal laws demands that you have full comprehensive insurance for financed vehicles. Usually that’ll run you around $100/month if you’re a decent driver.
If you purchased a bottom of the line 2012 Ford Edge, and began making payments in January 2012. After tax, tag and title and with a $5,000 trade-in, the final sales ticket was $25,000.
Steadily making the $445/month payment for all of the 2012, and just into 2013, you would have made 13 payments and reduced the principal balance of the loan to just under $20,000. As luck would have it, the vehicle is in pristine condition and it’s value is currently almost $21,000 (with 15k mileage on the odometer).
With a $21,000 trade-in, you are able to pay off the existing loan with $1,000 to spare to put towards a new-used vehicle, which just so happens to cost exactly $10,000. Now you only need to finance $9,000. New Monthly payment: $160.43. Monthly savings: $285.22.
Take it one step further, and continue making the $445.65 payments. You’ve been able to do it for over a year now! Doing this would leave you with 21 payments total. That is less than 2 years until: no more car payment.
You can see how easy it to become car loan free. Trading in the New SUV and paying off the new-used car early left us with a total saving of $11,586.90. I don’t know too many people with over $10k sitting around in their bank account. Maybe that correlates to people’s need to buy a new car every 3 years?
Having over $10,000 in the bank does a few things for you. First, you’d have cash to be able to pay for normal maintenance of the vehicle (tires, oil changes, insurance). Second, you’d have cash to be able to pay for major maintenance! And third, you’d be able to walk into a dealership and buy a vehicle with cash.
With cash in hand, you control the price that you pay at a car dealership!
Don’t give in to “New Car Fever”. When you feel the itch that you want something new, seriously weigh your options. A newer car may mean another brand new loan.
Instead, invest in yourself, let go of the 2-ton money pit, and hop into something a little less alluring with a way smaller price tag. Find a nice used vehicle for around $10,000. They do exist!
I helped a co-worker buy a 2008 Ford Fusion about 6 months ago, and it came out to just about $10k after taxes. It’s a really good vehicle too that will last at least another 5 years.
You can manage to change your financial future in one long Saturday at the car dealership. Your options are pretty easy:
- Finance a brand new car and spend big $$$.
- Buy a used car and save $10,000 cash.
Sounds like a pretty easy decision to me!
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