Does anybody really like debt?
Of course, some people just think debt is great. Those who are making money on the loans just might be among those 🙂 However, I’m certainly not. I tend to think that its good to practice debt-free living in most cases. In the case of buying a car, this applies too.
I say this from personal experience. Now, this experience doesn’t make me any different than anyone else, in that many people have taken out a loan to buy a car. That seems quite typical, as a lot of people try to buy a car based on being able to borrow. It’s almost like a rite of passage for a lot of people, their first car loan!
Well, I think it’s better to pay cash for a car. The one time I actually took out a car loan, I couldn’t stand it. Sure, the vehicle was nice though! The best one I’ve ever owned, and one that frankly I’d buy again if I had the right income level to fit that in. But I had to make payments on it each month, and it really took away from the enjoyment of the car.
Just the notion of actually making a payment every month reinforces the reality that you really don’t own the thing outright. The loan I took out was for just a few years, but that payment each month wasn’t fun to make. When you make a few payments, and realize that you have years – not just a few more months – to pay off the loan, it becomes yet another burden. I eventually paid the car off, and later got rid of it.
I learned from the experience, and bought the next car by paying all cash. It was used this time, but that’s okay. The feeling of owning it in full provided some sense of freedom that taking out a loan didn’t. Naturally, not everyone is in a position to do this at all times. If truly need a car, you’ll want a reliable one, and that might entail taking on a small loan if your circumstances dictate. But WOW is it better to just pay cash and forget about it.
A good way to make paying all cash for a car is to regularly set aside money in a car fund. You can almost pretend that you’re making car payments, but instead you’re saving money in a fund. Here is one example of go about it:
- Start years ahead of the purchase
- Figure out the kind of car you think you will need, rather than one you’d like to feel cool in. Don’t be one of the Big Hat, No Cattle people.
- Determine the cost of buying a quality used version of the car
- Calculate a monthly savings amount that will allow you to finish saving for it in 3 years
- Make sure whatever you’re saving does not take away from ample retirement savings or an emergency fund
- Regularly save each month in a dedicated account, and make it automatic
No interest paid, and you’ll have the peace of mind of knowing that you own the car outright when you buy it.
If you want to delay the process of saving for the next car, then truly embrace the idea that a car is something to safely get you from point A to point B, and not a status symbol. Accepting that car longevity is important is what got me to drive a car well past 200,000 miles. Sure, a few folks teased me about it. But isn’t saving money worth getting teased by others who overspend? I think so!
What About You?
How do you save for buying a car?
Do you take on car loans when buying a car, or do you pay in cash?
We took out a loan for the Jeep we bought last summer, but we only did that because the rate was so low (0.9%). We have the cash saved and would rather stash the cash. We do plan on paying it off completely either this year or next year though.
Michelle – that’a a nice rate! Better than what I paid.
I could have paid cash but took the 0.9% loan and kept the cash in the bank. Once it was no longer advantageous to keep Tue cash in the bank I just paid the loan off.
Lance – seems like you did the calculations, and figured out a process that was best for you. Nice!
With the exception of the first car I bought, I’ve always been fortunate to be able to pay cash for cars. Of course the car companies now routinely offer “zero percent financing” to seduce the more gullible among us into paying over time. Rest assured–if you’re not paying for the car in total upfront, you’re paying for borrowing money. It’s just built into the car’s price or into fees or some other subterfuge. You’ve got a lot more bargaining power to get the best deal if you pay cash upfront!
Kurt – cash is king, as they say! Good points.
We would love to pay cash for a car if we could. Unfortunately, we even have to take out loans for our beaters at this stage in our lives. I love that my wife and I agree that having a car as a status symbol is just not important at all, though. And that we’re both OK with driving the 10 year old car with the dented fender until the engine finally blows up at 230,000 miles. Having a car that is above your means is just another thing to stress out about.
Dave said sell the car, so that’s what we’re doing =) Granted, we can’t pay cash for our old beater, but we are drastically reducing our auto debt this way. And moving forward, we know better and will do better.
This is something many people struggle with and they just can’t do. Most people don’t even have an emergency fund let alone a car fund. I agree with everything you said, I just do not see it being a reality with people now a days. We all have made dumb mistakes with loans, I tend to think that if the car payment is less than 15% monthly income then it is not that bad. As long as you pay it off within 1-3 years.
We pay cash now, but when we were young we had trouble just meeting current expenses and had trouble setting aside a car fund.
The thing now is, that it is really hard to write out that big check amount when we pay cash. Physically and mentally difficult. Physically because it is hard to write out all those number if your car costs over 10K. Mentally because it is a big chunk of change going out the door!
We are actually doing what you suggested…laying aside money each month to purchase our next car with cash. We are probably about two years from that happening. And it’s gonna be awesome to not take out a loan to pay for it.
Brian – good for you, and yes that will be great to not have to take out a loan!
Jules – yep, no need to make car loans the default approach!
We paid cash for our last car. I took my laptop into the dealer, logged into my bank account, and wired them the money for a used Toyota Camry. I asked them how many people pay cash, and the salesman said almost nobody does. The thing is, by paying cash, you spend less because it hurts more.
I never separate savings and buying cars.
What I mean is, sometimes, in fact most times, if you have the cash, it’s still better to take a loan.
For instance, if I’m earning 5 percent in my savings, then it would make sense for me to get a loan for 5 percent or less, that way my money can keep compounding. In the end, this will give me more money for retirement.
I agree that going into debt is the worst thing you can do. But I also believe that if you have the money, and that money is compounding, then I’d rather keep my money compounding and take a loan out rather than pay cash.
Nice post.Don’t mention to the trader that you will be paying money until after the buy cost is locked in. This is because dealers make a charge on your lend. If they know they won’t be making that money, then they won’t come down as far on the price.