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How To Never Have A Car Payment Again

by Keith Rawlinson
Volunteer Budget Counselor

You're always going to have a car payment, right?

Not always

I've heard it hundreds of times: "you're always going to have a car payment, so you might as well drive something nice."  Well, I can tell you firsthand that statement is not true.  I haven't had a car payment in over fifteen years.  I don't drive a fancy car (although I could), but I don't drive a pile of junk either.  When I buy a car now, I pay cash.  No muss, no fuss, no car payments.

How can this be?  

Is it really possible for the average person to pay cash for decent cars?  Absolutely!  I do it and I know of many other people who pay cash for cars as well.  The secret is to sacrifice now so that you can drive a nice, payment-free car later.  For most people, that's not easy.  Most people are not willing to sacrifice.  They want a nice car now and they're not going to wait for it.  That means lease or loan payments.  That also means that most people are broke and financially stressed.

How not to buy a car  

Before we get into how to buy a car, let's talk about how not to buy a car.  Rule number one:  never, ever lease a car.  Statistically, leasing is the most expensive way to have a car.  Think about it:  the company leasing the car to you has to not only pay for depreciation, but they also have to make a profit or they are out of business.  That profit can only come from one place--you!  Can you imagine what it would cost you to drive a rental car every single day?  Well, leasing a car is basically just a very longterm rental agreement.  You give them cash up front, you pay a fee (lease payment) during the time you have the car, then you give the car back to them at the end of the lease and pay any damages or excessive mileage.  Sounds like a rental to me!

And about that excessive mileage:  I know of a family who leased a car and ran the mileage up very quickly.  The over-mileage fee at that time was about seventeen cents per mile.  The average car is driven 15,000 miles per year, so their over-mileage fees would have come to $2,550 per year which is $212.50 per month on top of their lease payment expense.  For the last year they had the car (waiting for the lease to end) they had to park the car in the garage and buy an old junker to drive because they couldn't afford both the lease payment and the over-mileage fees.  Statistics have shown that the average person who leases a car pays an additional $1,000 in fees and expenses when they turn the car back in at the end of the lease.

The reason leasing looks good to so many people is because they are thinking short term.  You lease a car for three years, make a lower payment than if you had bought the car, turn the car back in at the end of the lease, and start another lease on your next car.  Let's look at this situation both short term and long term assuming the life of a car is about 9 years (it's actually more like 10 years, but we'll use 9) and we're going to sign up for a three-year lease.  We are looking at a car that sells for $23,000 new.

If we lease:
We have a lease payment of say $350 per month.  We pay the lease company $1,100 in 'due at signing' costs and we drive the car for the entire three-year lease.  During that 3 years, we have paid 36 payments of $350 which comes to $12,600.  We add in the $1,100 we paid up front to bring it to $13,700.  When we return the car, we pay the statistical average of $1,000 in mileage, wear and tear, cleaning fees.  So, at the end of three years, we have paid a total of  $14,700 to drive our leased car.  At the end of the three years, we do it all again to lease another nice, new car.  Using the same numbers we just calculated, over nine years of driving (three different car leases) we have spent $44,100 to have a car for nine years.  We are averaging a cost of $4,900 per year to drive a leased car.

If we buy:
We can reasonably assume a payment of somewhere around $400 per month.  That's $50 more per month than the lease payment, so at this point the lease is still looking pretty good.  We drive that same car for it's entire nine year life.  In six years, the loan is repaid and we have made $28,800 in payments.  Lets say that during the nine years we've owned the car, we have put $6,000 into repairs.  When we are done with the car at the end of our 9 years, we manage to sell it for $500.  So,  we made $28,800 in payments, paid out $6,000 in repairs, and got back $500 when we sold it.  $28,800 + $6,000 - $500 = $34,300 we have paid to drive the car for nine years--an average cost of $3,811 per year.  The leased car cost us $1,089 more per year.

In this example, in nine years we have paid $9,800 more to lease a car than to buy one.  Yes, I understand that you got to drive a car no more than three years old with the lease,  but for the first three years, you were doing the same when you bought the car.  So, for six years, you paid $9,800 to be able to drive a car that is a few years younger.  Also consider that when we bought the car and got the loan paid off, we got to drive about three years making no payments whatsoever; when you lease one car after another, you have payments for the rest of your life!  Taking on those kinds of payments for the rest of your life makes it really hard to get ahead financially, and even harder to ever become wealthy.

In the above example, I tried to use realistic numbers.  And to keep it realistic I even figured high on car repairs.  We may not, for example, end up spending $6,000 in car repairs over a nine year period.  If we spent less, then the purchased car looks even better over the long term.

Hopefully, you can see that any advantages to leasing a car pretty much disappear after the first three-year lease.  The dealer leasing you the car will tell you that it costs less to lease a car than to buy one, and that is correct--but only for the term of your very first lease.  After that, leasing a car gets more and more expensive while a purchased car gets cheaper and cheaper.  Remember that in a lease you are pretty much just renting the car, and renting is an expensive way to have a car.

Put it this way.  You ask a close friend of yours if you can borrow his brand new car.  He says to you "sure, you can borrow the car, but you have to give me $1,000 up front, make my car payment during the time you drive the car, then pay a fee for mileage when you return it."  Would you borrow a car under those conditions?  I certainly wouldn't; but, that's exactly what you're doing when you lease a car.  Never lease a car!

Keep in mind that I do not recommend buying a new car as we did in this example, so wait until we get to the section on how to actually buy a car.  You're really going to see a cost difference then!

Buying a new car
Let's now go on to rule number two:  never buy a brand new car.  The only reason I used purchasing a new car in the previous example is because that is what most people do--they either buy a new car, or lease one.  Do you realize that when you buy a brand new car it loses 10 to 20% of its value as soon as you drive it off of the dealer's lot?  Did you know that after only two or three years, a new car is worth only about half of its original value?  Do you realize that after just four years a  new car is only worth somewhere around 40% of what it cost new?  That means that if you bought a brand new, $23,000 car, its value drops to around $20,000 as soon  as you drive it off the lot--you just took a $3,000 hit and you haven't even gotten the car home yet.  After two years, your $23,000 car is worth around $11,500.  You took a hit of over $11,000 in only two years!  Then on average, in five to seven years when your $23,000 car is only worth about $9,000 you get rid of it, buy another new one, and start the whole thing over again!  How are you supposed to ever get wealthy when you're losing money that fast?  This incredible drop in value is how you end up owing more on your car than it is worth.  We call that being "upside down" on the loan.  

Far too often when someone does trade in their car and buy a new one, they roll the balance still owed on the old car into the loan on the new one.  That's insane!  Never roll a previous loan balance into a new one!  You're taking an unbelievable hit in the first place by buying a new car that lost two thirds of its value in the time you had it, and you're rolling that loss into a loan on another car that is also going to lose value just as quickly.  The car debt gets bigger and bigger, the payments go on longer and longer, and you wonder why you're stressed out trying to make your car payment!

Yes, I've heard the argument that if you buy a new car, it comes with a warranty so you won't have any major repair costs.  Well, very little goes wrong with a car until it is around four years old.  If the life of the car is say nine years, then you really only have major repair costs for maybe five years of the life of the car.  If you trade the car in at five years old or less, you aren't likely to have had many huge repair costs.  Since your $23,000 car has lost 60% of its value in that time, it has lost a total of $9,200.  Do you really think you would have put $9,200 into car repairs in that time?  Not likely.  Besides, for that kind of money you could have put in a new engine and transmission.  See, the warranty is no reason to by a brand new car.

If you truly want to get ahead financially, then never buy a brand new car.
Here's how to buy a car 
First of all, only buy cars that are two years old or older.  That way whoever bought it new took the 50% loss in value in those two years instead of you.  Secondly, and probably most importantly, never buy a car you can't afford.  How do you know if you can afford it?  Easy--if you can't pay cash for it then you can't afford it.  The fact that you are ready to take on payments for a car tells you that you can't afford it.

So, now I'm going to show you how to buy cars in such a way that you can eventually drive cars that are only two years old, and never have a car payment through the entire process.  Notice that I said "eventually" drive two year old cars.  You probably aren't going to be able to drive something that nice at first.  Okay, here is how it works:

The average car payment in America today is around $400 per month.  But, just to make sure you believe that what I'm about to tell you will work, I'm going to use a payment of only $250 per month.  So, let's say that you figure you can afford a car payment of $250 per month.  If you have absolutely no cash on hand to start this process, then you hold off on buying a car and save that $250 for four months after which time you would have $1,000 saved up toward a car.  Now, let's assume you have to have some sort of car to get around and to drive to work or school.  So, you go out and buy a $1,000 used car.  Yes, I know that a $1,000 car is a piece of crap; but, you won't be driving it very long.  Let's further say that you drive this car for one year during which time you spend another $1,000 in car repairs.  During this year, you also continue to save up that $250 per month.  After driving the 'crap car' for one year (and a year goes by quickly,)  you have saved up $3,000 in cash, spent $1,000 of it in car repairs, and have a car worth $800.  You sell your 'crap car' for $800 and this is the result:  $3,000 saved up minus $1,000 in car repairs plus $800 from selling the 'crap car.'  $3,000 - $1,000 + $800 = $2,800.  You have only been driving the 'crap car' for one year and you already have $2,800 to put toward your next car!  

So, now you go out and buy yourself a $2,800 used car.  You drive it for one year while you continue to save up your $250 per month.  After that year, you've had say $800 in car repairs and sell the car for $2,300.  The results:  $3,000 saved up minus $800 in car repairs plus $2,300 from the sale of the car.  $3,000 - $800 + $2,300 = $4,500.  Now you can go out and pay cash for a $4,500 car.  

A $4,500 car is quite a step up from the 'crap car' we started with.  Since this is a bit nicer car, let's drive this one for two years instead of one.  After those two years, you've saved up $6,000 spent $1,400 in car repairs, and sell the car for $3,000.  $6,000 - $1,400 + $3,000 = $7,600!  You go out and buy a pretty nice, used, $7,600 car and drive it for three years.  

In those three years, you've saved up $9,000 had $2,000 in car repairs, and sell the car for $5,000.  $9,000 - $2,000 + $5,000 =  $12,000!  

You can now pay cash for a $12,000 used car.  This is the same $23,000 car you would have bought new, it's only two years old and you are driving it with no payments!  Exciting?  It should be.  Especially when you consider that you did all of this in only seven years.  Do you realize that's how long many car loans take to be paid off?  Normally, you would be trading in the car you bought new, rolling the balance into another loan, and buying another new car on which you make another seven year's worth of payments; or worse, be making lease payments all of that time.  But not now.  You are now driving a two year old car and have no car payment at all!  All you do now is drive that car as long as you wish while you keep saving up that $250 per month.  You are now at the point where you could, if you wanted to, go out and buy a two year old car every three years and never have a car payment!

It's up to you

At this point you need to realize that this was all figured with just a $250 per month car payment.  What if you could afford a $350 per month payment, or even a $450 per month payment?  What if you were willing to drive that 'crap car' an extra year?  Instead of taking seven years to be paying cash for two year old cars, you could do it in three or four years.  See, if you were willing to sacrifice for three to seven years, you would never have another car payment for the rest of your life and be buying cars that are only two years old.  Plus, you could be buying another car every three years.  Or, you could instead continue to buy or lease new cars, take the hit in depreciation, have car payments the rest of your life, never be out of debt, never have financial peace-of-mind and always be broke.  Yes, people may laugh at your 'crap car' for the first year or two, but they won't be laughing when you never have to drive a car that's more than three years old again, and you never have another car payment.  It takes time and effort.  It takes sacrifice and determination.  It's not easy at first; but, it is most certainly worth it!  I can assure you that buying cars this way really does work.  I paid $8,000 for one of my cars and just wrote the seller a check!  I really could have gotten an even nicer car if I had wanted to, but I liked the car so much that I drove it for five years.  Imagine how many "car payments" I was able to save up in that time!  Imagine how nice my next car could be!

Is it hard to discipline yourself to start buying cars this way?   Yep, it sure is.  Is it easy to stick with it?  Nope.  It takes discipline, and a lot of sacrifice--and that's why most people will never do it the way I just taught you.  That's why most people will be broke, financially stressed and making car payments for the rest of their lives!

The method for buying cars I just showed you is how many millionaires do it.  In fact, statistics show that most millionaires buy cars that are at least two years old.  This is one of the things they've done to help them become wealthy in the first place.  Now you know.  As always, the choice is yours:  have payments and debt for the rest of your life, or use what you've learned here to take another huge step toward becoming wealthy.

To learn a lot more about saving, investing, eliminating debt and becoming wealthy, please read the articles on the Financial Page.  There, you will find a veritable treasure of what to do and how to do it.
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Please know that all of the thoughts, information, suggestions and techniques given on this site are nothing more than the author's opinion on the matter being addressed.  Do further research before making any decisions.

This article copyright 2007 by Keith C. Rawlinson (Eclecticsite.com).  All rights reserved.

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