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Car payments are annoying.
Every month you have to make a payment of a few hundred dollars for an asset that is losing value every day.
And with new car loans extending out 7 or 8 years, many people end up in a dangerous upside down world where they owe more than the car is worth.
Luckily, there is a better way.
You can live your life and never have a car payment again.
In this post, I am going to share with you 2 ways you can go about never having to send in money to pay for a car loan again.
As great as this sounds, what is even better is it is simple to do and anyone can get started right away.
Table of Contents
How To Never Have A Car Payment Again
The Issue With Car Loans
The issue with car loans is three-fold.
First, you are in debt for a depreciating asset.
This is a fancy way of saying your car is losing value.
You take out a loan for $40,000 and by the end of the loan term, your vehicle is now worth $10,000.
The second issue is that because the price of vehicles continues to increase and people are not saving money for new vehicles, it is harder to make ends with and have a car payment.
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For example, a 5 year loan on a $40,000 car is over $700 a month!
The only way to get a lower monthly payment is to put down more money or extend the length of the loan.
Since extending the loan is the easiest option, most consumers pick this one.
But while a $40,000 loan for 7 years is $515, you are putting your finances in jeopardy.
This is because by the time the loan is paid off, your car is close to worthless.
So trading it in is only going to get you $1,000 to $3,000.
And if you try to sell your car sooner, you are going to have a huge loan to pay off.
Looking at the 7 year loan example again, if you try to sell after 4 years, you still owe close to $18,000 on the car loan.
Odds are your car is not worth this amount so when you sell it for $14,000 you still need to come up with $4,000 to pay off your loan or you need to roll your unpaid balance into a new loan.
And finally, when you take out a car loan, you have to worry about your credit report and your credit score.
If your credit is not perfect or you have bad credit, you are going to be charged higher interest rates, costing your even more money.
And even if you have good credit and can get a lower interest rate, you are still paying more for the car when you take into account these finance charges
Plus you are now on a payment plan that you cannot skip a month, and if you make a late payment, you are hit with late fees and possibly a higher interest rate.
Luckily, there are some ways you can avoid this nightmare scenario.
Keep Your Car Longer
The first option is to simply keep your car longer.
Many people buy a new vehicle, take out a 5 year loan, and once that loan is paid off, they start shopping for their next vehicle.
Once they find one, they trade their car in and take out a 5 year loan for the new vehicle.
The solution is to stop this madness by keeping your car longer.
Most cars on the road today can easily last 10 years or more and can go 150,000 or more.
All you need to do is keep up with regular maintenance and the extra costs associated with this will be minimal.
Let’s look at how this plays out in terms of money.
You take out a 5 year loan on a $35,000 car with monthly payments of $617.
After the car is paid off, you keep it for 5 more years.
During these 5 years, you have no car payment, so you take the $617 each month and put it into a separate savings account to buy your next car.
When it comes time to sell your car and buy a new one, you have $37,000 saved and this doesn’t even include any interest you earn.
You also have the $1,500 that you get for your current vehicle, so you have a total of $38,500.
Now you can buy a new car and not even take out a loan.
Just keep putting $617 every month into your bank account and the cycle repeats.
Buy Cheap Used Cars Every Year
This method might sound crazy, but buying a used vehicle is perfect for anyone who gets bored with their car.
It allows you to have a new to you car every year and never have a car payment at the same time!
Here is how it works.
The average car payment for a car loan is roughly $500 for a new car and $350 for a used car.
In order to start the ball rolling, you need to have a car payment to yourself for $425 a month.
If you do this for 6 months, you have $2,550 to buy a reliable beater car.
Don’t let the name fool you.
You aren’t buying a junker here.
You are buying an older car in great condition.
Once you have your new car, you drive it for 10 months.
During this time, you save $350 a month for another car.
After 10 months, you sell your current car and use the money to buy another car.
The beauty here is because you didn’t put a ton of miles on the car and the depreciation has already been accounted for, you can sell it for close to what you paid for it.
We will say you sold your old car for $2,000.
So you have the following for your next car:
- $2,000 from the sale of your current car
- $3,500 from your monthly savings
This is a total of $5,500 for a car.
You buy a newer car for $5,000 and repeat the process above.
In 10 months, you have the following saved:
- $500 from your original savings
- $4,500 from the sale of this car
- $3,500 from your monthly savings
Now you have $8,500 for your next car and you repeat the process again.
After another 10 months, here is what you have, assuming you bought your last car for $8,000.
- $500 from your original savings
- $7,500 from the sale of this car
- $3,500 from your monthly savings
You now have $11,500 for another car.
This process can be repeated until you find a car you love and want to keep for longer than 10 months.
You could even stop before this point as well.
It is entirely up to you.
Fast Tracking The Process
You could get the ball rolling on this idea even faster if you sell your current car.
The only issue you might run into is if you have a loan, you might owe more than the car is worth, otherwise known as negative equity.
This is what I was talking about in the beginning about being upside down.
It happens to a lot of people and starts of innocently enough.
You finance a new car and a couple months later no longer want the car.
Instead of keeping it, you trade it in for another new car.
But since the loan on your trade is more than the cars value, you have two options.
- Come up with a lump of cash to pay off the difference
- Roll the difference into a new loan
For example, let’s say you have a remaining balance on your loan of $35,000 and the amount you get for selling it is $25,000.
You could either take $10,000 out of savings to pay this balance off, or roll it into a new loan.
Let’s say you roll it over.
The car you are now buying is $40,000.
You don’t have any money for a down payment since the $25,000 you got from the sale of the other car went to pay down the loan.
So you finance the entire $40,000 plus the $10,000 to completely pay off the old loan.
But, the monthly payment of $50,000 is too high for you to handle.
So you take out an 8 year loan on the new car.
Fast forward 6 years from now and you want a new car.
Your current vehicle is worth $10,000 but the balance of your loan is just under $17,000.
So the process repeats itself.
You trade in the vehicle and put the money towards the old loan, bringing the balance down to $7,000.
Not having $7,000 in cash, you roll this into another new loan.
The cycle repeats itself over and over again.
Frequently Asked Questions
I get asked a lot of questions about never having a car payment again.
Here are the most asked ones.
Isn’t saving money every month for a car the same as having a car payment?
It is similar but there are key differences that make this method one of the best financial decisions you can make.
First, you aren’t tied to an actual loan.
So anytime you want to stop saving and just drive your current car, you can.
Another benefit is you are putting the money into a savings account.
So in 3 years if you decide you love the car you are driving, you have $3,000 in cash you can spend however you want.
Finally, the amount you are saving each month is less than a typical car loan.
This improve your monthly cash flow because less money is tied up as a monthly debt payment.
In an ideal world, you would take the $150 difference and invest it every month.
In 10 years earning an average 8% return you have $28,000 in extra money that can be used for a vacation, a new house, retirement, etc.
Aren’t there higher maintenance costs with buying an older car?
If you buy the wrong car, you will have high maintenance expenses.
But if you stick with reliable cars that are cheap to maintain, you will come out ahead.
Plus, since you are only owning the cars for 10 months at a time, the odds of something major happening are slim.
The best car brands to consider are Toyota, Lexus, and Honda.
What will happen to my auto insurance?
Here is another benefit of this strategy.
When you keep a car for a long time or buy older cars, your insurance rates will remain low.
This is because an older car doesn’t cost that much to repair in the event it is in an accident.
Regardless of what your insurance currently is, if you have been with your insurer for 3 years or more, you are probably paying more than you should.
I recommend you try Insurify.
It’s a free tool that will give you quotes from the top rated insurers out there.
If you find a better rate, Insurify will switch your coverage for you.
The average person saves over $500 a year by using Insurify.
Click on the link below to see how much money you can save.
At the end of the day, it is possible to never have a car payment again.
And the process of making it happen is simple to follow.
The reality is we waste a lot of money on buying cars.
We spend a large amount of money on them and then only get a fraction back when we sell it.
If you can follow the advice in this post, you will remove a huge monthly expense from your finances and this move can completely change your financial situation for the rest of your life.