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The Truth About Car Payments

“I’ll always have a car payment.”

You’ve probably heard that comment before, right? Or if you’re honest, you might have even said it yourself—with a defeated, woe-is-me tone of voice. So, what’s the deal? Are car payments really just a way of life? Well, maybe—if you’re not thinking outside the box.

When it comes to money, being normal means being broke. In this case, you want to be weird, and weird people don’t have car payments. You might be wondering, How exactly do you live without a car payment?

That’s a great question. But before we get into that, let’s talk about how car payments work in the first place.

How do car payments work?

Having a car payment means your car is actually not even yours! It’s owned by the bank or financial institution that loaned you the money to pay for it. When you take out a car loan, you’re telling the lender that you promise to pay back the amount they loaned you (plus interest) within the time frame you both agreed upon.

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Let’s say you have your eye on a brand-new car—a car that you really, really want. And like most “wants” do, the need for that car starts to follow you around until it seems like life just won’t go on without it. You start seeing the car everywhere—in your dreams, on your drive to work, and even parked in front of your favorite coffee shop. Next thing you know, you’re walking into the dealership and shaking hands with Billy Bob . . . securing yourself a brand-new ride and a mountain of car payments. Sound familiar? We thought so.

So when it comes to calculating your car payment, these companies consider the price of that dreamy new car, any trade-in or down payment you have, the interest rate on the loan, and the number of months it will take you to pay off the loan.

How much is the average car payment?

A recent study by the Federal Reserve Bank of New York found that 7 million Americans are more than three months behind on their car payments.1 Yikes.

It might just have something to do with the fact that according to Experian’s Q4 2018 State of the Automotive Finance Market report, the average car payment for a new car is a whopping $545 and interest rates are rising across the entire auto industry with the average interest rate landing at 6.13%.2 And people are still opting for a five- to six-year term on their loans. No wonder it’s harder and harder to keep up with the payments. 

Here’s the kicker: The car dealer won’t tell you that your awesome new car will lose 60% of its value within the first five years!3

What does that mean? After six years, you’ve paid almost $33,000 for a $26,000 car, which is now worth maybe $6,000. That’s not a good deal. Not to mention, if your car loses value faster than you can make your payments, you’re on the road to an upside-down car loan.

How can you get a car without a car payment?

You might think living without a car payment can’t be done. Or you might be thinking this kind of thing is reserved for people like Richie Rich. But that’s not true. With a little bit of hard work and a mission to live like no one else, you can get your next car without a car payment!

But what can you afford? Well, if you can’t write a check or pay for a car with cash on the spot, you can’t afford it. Sounds radical, doesn’t it? So, how are you ever supposed to buy a car? Before you throw yourself a life-sized pity party, we want you to know there’s hope—and it’s all about changing your mindset. 

1. Buy a cheap used car.

Here’s a new plan: What if you bought a cheap $2,000 car just to get around for 10 months? Then you take that $530 (the average car payment) and save it every month to pay for a new car—with cash!—instead of giving it to the bank.

2. Save what you would’ve spent on your car payment.

After 10 months of doing that, you’ll have $5,300 to use for a new-to-you ride. Add that to the $1,500–2,000 you can get for your old beater car, and you have well over $6,000. That’s a major car upgrade in just 10 months—without owing the bank a dime!

3. Sell the cheap used car and buy the car you want with cash!

But the fun doesn’t end there. If you keep consistently putting the same amount of money away, 10 months later you would have another $5,300 to put toward a car. You could probably sell your current $6,000 vehicle for about the same price you paid for it 10 months ago. Now you have more than $11,000 to pay for a new-to-you car—just 20 months after this whole process started.

The bottom line is: What could you do with that $530 if you weren’t paying it to the bank every month? Anything you wanted!

Think about it this way: If you were happy with your paid-for car, you could invest that $530 into a good mutual fund. With a 12% rate of return, you would have over $125,000 in 10 years! In 20 years, you’d have over $500,000. And in 40 years? That mutual fund would be worth over $5.4 million!

Those numbers will make your head spin, but it really just comes down to simple math. The less money you’re spending on your car every month, the more money you have to put into other more important things, like paying off any other debt you have, putting away money for your kids’ college fund, saving money for the retirement of your dreams, and so much more.

If you just follow this simple plan, your life could be dramatically different 10 years from now. Think about it. You can live without a car payment!

Whether you’re struggling to make car payments each month or you’ve got student loans up to your eyeballs, all debt will weigh you down and keep you from achieving your money goals. Learn how to ditch that debt for good and take control of your money for real with a Ramsey+ free trial. Stop making payments. Start making progress. 

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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