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Should I Pay Off My Car Early?

If you’re living paycheck to paycheck and feel like as soon as money comes in, it goes right back out, it’s time to ask yourself: Which payments can I get rid of first?

For starters, you might want to look in your driveway!

Paying off your car might not be the first thing that comes to mind when you look at your budget, but if you have a car payment, it’s really stealing from your income.

Over the past decade, car debt has gone up 60%, and the average car payment is now $545!1,2

I’m sorry . . . What?

If you invested that much money every month for the next 40 years, you would have $5.2 million. I mean, I like my car too, but not that much!

Most people want a nice car, and I get that. You don’t want to drive around in something you aren’t proud of or that feels like it’s going to break down every time you drive it. Neither do I. We all want to drive a car we love and one that’s safe and reliable. But you don’t need to be in car debt to have that.

3 Reasons to Pay Off Your Car Early

Making payments on a car is the fast track to financial mediocrity. So, let’s talk about why you should pay off your car as soon as possible!

#1. You’ll save money on interest.

A car goes down in value the second you drive it off the lot, but your payments are based on what it was worth while sitting in the showroom with only five miles on the odometer. That means a few years later, you’d still be paying the brand-new car price even though the vehicle is worth half (or less) of that.

Paying interest on something that’s worth less and less every month is a terrible idea, no matter how much money you have. That’s why I say car debt is the dumbest type of debt.

A $20,000 car loan at a 6% interest rate would cost you $3,199 in interest over five years. You guys, just the interest costs more than some people spend on their whole first car!

But let’s say you’re one year in to having the car and making payments, wondering, Should I pay off my car early? You’d have roughly $16,500 left on the loan. If you attacked your car debt like crazy for the next year and doubled your payment, you’d save over $1,100 in interest.

There are so many good things you could do with that money, like throw it at other debt or save for the next car. So yes, absolutely—you should pay off your car!

#2. You’ll be out of debt sooner.

Paying off your car will not only save you money in interest, but it’ll also get you out of debt sooner! Using our previous example, if you doubled your car payment, you’d shave over two years off the life of your loan.

That’s two years of time when you could either throw that cash at other debts or pad your savings account. Cha-ching!

#3. You’ll have paid-for cars for life.

The thing about saving money is, it’s totally addicting. Once you start seeing results, you won’t want to go backward into debt for a car payment ever again. You probably won’t even mind driving your current car a little longer while you save cash for your next car!

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Keep adding that would-be car payment of $550 to your car-replacement fund every month for another two years, and you’ll have over $13,000 to pay for your next car. Drive that car for five years, while continuing to save for the next car, and you’ll have $33,000 for the next one, and so on. Keep following that same formula over and over for the rest of your life. You’ll never have a car payment again!

How to Pay Off Your Car

If you have a car payment currently, it’s time to either pay it off with the debt snowball or sell it.

If you owe more on it than it’s worth, you could sell it and take out a small loan for the difference. At that point, you’d just buy a cheap, reliable car with cash and start the savings plan from there.

This may mean that you have to drive an older, $1,000 car around for a while. I know that sounds terrible, but it’s just temporary. If driving a 20-year-old Camry for a year or so now will enable you to drive whatever you want in the near future, it’s worth it!

Make saving for a car a new habit, even if you don’t need a new car today. We all know we’ll need to replace our cars at some point. Depending on how much you drive, you may replace cars more frequently than other people. Add a new line item to your budget so you can start saving money in a car fund.

I don’t want you to even consider a car loan as a possibility. For extra motivation when you’re saving up for a new car, try out my free 14-Day Money Finder. You’ll find more money than you thought possible in just two weeks!

Alright, still not convinced to pay off your car? I’ve heard every excuse in the book from people who want to justify a totally ridiculous car payment. Here are some of the excuses I get . . .

3 Bad Excuses for Having a Car Payment

1. “But it’s at 0% interest. Isn’t that a great deal?”

No, it’s not, because that new car starts losing money the instant you drive it off the lot.

From the first month of ownership, you’d owe more on your car than it’s worth. Four years later, you’d still have a year or two of payments left on it, but your car would’ve lost around 60% or more of its value.

Besides, 0% is not the same as cash, and not everyone who falls for the 0% marketing pitch actually qualifies for the deal. But by then, you’re already in love with the car of your dreams and are willing to sign anything to drive it home. And of course, some of those “deals” aren’t quite as attractive once you read the fine print.

You guys, making money off of car loans is their business. You’re not outsmarting anyone.

2. “But I just had a baby, so I need a ‘safe’ car—like a new Tahoe.”

This is one I hear all the time from people I know who have kids—especially new parents. Do babies take up more room? Yes. Do you want your baby to be safe in the car? Yes. But those things don’t equal a new Suburban. Safe doesn’t mean new.

There are plenty of safe, pre-owned cars out there for you to get a good deal on. In fact, I made a little video about it to help you find one:

I’m talking to myself on this one, by the way. I think the cool, new SUVs are gorgeous! But I always have to stop, take a breath, and check my motivations for wanting one. Sometimes I think I’m more drawn to the car as a status symbol than anything else.

Maybe you are too. We can’t let our need to keep up with the Joneses drive our money habits and decisions, though. Remember, the Joneses are broke. Keeping up with broke people who are just trying to look rich is a bad plan.

3. “But how am I supposed to buy a car without a car loan?”

We talked about this earlier, so you already know the answer is simple: Save up and pay cash for your cars.

Yep, I mean it.

All it takes is a new decision to pay yourself instead of the bank. If you have a car loan, go crazy and pay it off quickly, or even sell it to get the process rolling to pay yourself instead of the bank!

The first car you buy with cash might not be your dream car, and that’s okay! Just because it’s not your dream car doesn’t mean it has to be a junker. Pick out a car with a body style that doesn’t change often. I can’t tell you how many luxury-brand cars I see on the road, and yet have no idea what year they were made. They could be brand new or eight years old, and I wouldn’t be able to tell just by looking at them. The moral of the story is, own your cars—don’t let them own you!

Why Paying Off Your Car Is a Key to Wealth

I know people think I’m crazy when I say you should pay off your car. Living without a car payment is definitely not the norm in our culture. Most people have bought into the lie that you’ll always have a car payment. If that is your mindset—if the two cars in your driveway are stealing $1,100 in car payments from your hard-earned money every month—it’ll be hard for you to get ahead of living paycheck to paycheck.

The truth is, few things will keep you as broke over the course of your life as car payments. The routine of making car payments every single month of your entire adult life is one of the worst financial habits out there.

If you want to live the life you’ve been dreaming about, without money stress, you’ve got to break the car payment habit and replace it with a habit of saving.

If you can make that mental shift and pay off your car, you can free up literally millions of dollars in potential retirement income. This is a big, big deal.

So, what would happen if you paid off your car? What would your life look like five, 10, or 20 years from now? Do you love your car so much that you’re willing to sacrifice your future for it?

Paying off your car will be one of the best financial decisions you can possibly make. Then, save up and pay cash for the next one. Trust me, feeling good about the future is better than that new car smell.

If you’re ready to start saving money and creating a life you love, then check out my 14-Day Money Finder. It will help you stop living paycheck to paycheck and find money you probably didn’t even know you had!

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Rachel Cruze

About the author

Rachel Cruze

Rachel Cruze is a #1 New York Times bestselling author, financial expert, host of The Rachel Cruze Show, and co-host of Smart Money Happy Hour. Rachel writes and speaks on personal finance, budgeting, investing and money trends. As a co-host of The Ramsey Show, America’s second-largest talk radio show, Rachel reaches millions of weekly listeners with her personal finance advice. She’s appeared on Good Morning America and Fox News and been featured in TIME, REAL SIMPLE and Women’s Health, among others. Through her shows, books, syndicated columns and speaking events, Rachel shares fun, practical ways to take control of your money and create a life you love. Learn More.

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