Most drivers have a car note. I used to be one of them and I hated it. Granted my monthly payment was pretty low, at least $100 of it went straight toward interest when I first started making payments.
Plus, I had to get work done on my car and only had a partial warranty. My car was probably largest expense in 2014 thanks to my loan, repairs and maintenance and transportation costs.
I know I’m not alone though. According to Bankrate, the average monthly payment on a new vehicle is $479. I’ve also noticed that car loan terms have increased to up to 84 months on average. My question is, who in their right mind wants to spend 7 years paying off a car?
Cars depreciate in value over time so by the time you finish paying off your loan, it will be worth much less than what you paid for it originally meaning you’ll lose money. Also, don’t get me started on leases.
Leasing a car sounds like a good idea upfront, but it comes with many challenges and restrictions that I don’t think are worth it. Plus, I personally want a car that’s mine, not one that I have to return in 24 months in mint condition.
With that being said, my husband and I are planning to pay for our next car in cash and I’m pretty excited about it. Here’s how we’re going to make it work.
Giving Ourselves Enough Time to Save
I believe most people get pressured into taking out a car loan because they need a car quickly and can’t afford to pay for one in cash. Or, they only have enough money for a down payment since they couldn’t afford a decent working car with the cash they have on hand.
This was the situation for both myself and my husband. I don’t want to let it happen again either. That’s why I plan to start setting aside money little-by-little to pay for our next car so we don’t have to take out a loan again.
Right now we both have cars that work pretty well but we’re not taking it for granted. Instead, we’re taking advantage of the time we have so we can stack our savings to purchase something nice.
I’d guess we have at least 3-4 more years of driving our cars before any serious issues arise so our goal is to save around $10,000 to $12,000 in that time so we can buy a decent used car.
We’re Not Considering a Brand New Car
The new car craze doesn’t really work on us. We’re not wooed or impressed by brand new vehicles – especially not once we see the price tag.
According to USA Today, the average cost of a new car is $33,560 which is something we wouldn’t be able to afford with cash.
New cars look nice but have a short shelf life. As soon as you drive it off the lot, the value depreciates. We’re more interested in an economical car that drives well and realize that means it doesn’t have to be brand new.
Even buying a car that’s a few years old will be much cheaper than something brand new and it shouldn’t require a ton of maintenance in the beginning.
We’re Downsizing to a One Car Family
Having two cars is a convenience but no longer necessary for us. Two cars often means two car payments (if you financed them), two insurance payments, and twice the gas and maintenance.
I’m hoping that when both of our cars are no longer working, we can afford to buy one family car in cash that we can share. Since I work from home now, I don’t use my car as often and my husband works a pretty long shift so I could always drop him off to work or walk or ride the bus when the weather gets nice since we live in a pretty central area in town.
Having one car would eliminate a lot of financial stress for us and it would be easier to adapt to since our son’s school is within walking distance and I work a very flexible schedule.
Putting Our Extra Money in a High-Yield Account
Earning extra money to boost our savings rate will help ensure that we can pay for our next car in cash. Right now, my blog is considered a side hustle and I also take on brand ambassador gigs every now and then to earn extra money.
My husband drives for Uber on the side and earns bonuses at work occasionally. If we keep our living expenses low and continue to maximize our savings, we should be able to meet our goal within a few years.
Keeping our savings in a high-yield account also helps because we can earn interest on the balance. I use CapitalOne 360 which is an online bank with a .75% interest rate which knocks most brick and mortar banks out of the water.
Why You Should Buy a Car in Cash
While taking out a loan can seem tempting especially if you are given a promotion or low-interest rate, I am a big advocate for paying for your car in cash if you can.
Here are a few reasons why:
- Financing a car is not even one of the best ways to build credit
- Financing leaves you with little room to negotiate a discount
- You’ll lose money over time as you pay interest
- The car is not really yours as long as you have a loan
- A car payment can make your budget tighter or prevent you from being able to save
- Car loans mask the true cost of your car (since you pay more with interest and the value depreciates over time)
If you want to set a goal to purchase your next car in cash as well, set a budget, consider buying used, and start saving early. You won’t regret it.
Which do you prefer when it comes to buying a car, cash or financing?
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