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The Truth About Car Payments

“I’ll always have a car payment.”

You’ve probably heard that before, right? Or maybe you’ve said it to yourself—to justify getting that shiny, new car. Hey, we get it. Nobody likes having a car payment. But are they just a way of life, like filing your taxes and doing your laundry? Spoiler alert: They’re not.

Let’s talk about how car payments actually work—and what your options really are (yes, there’s more than one) before you get behind the wheel.

What Is a Car Payment?

Let’s say you have your eye on a brand-new car, one that you really, really want. You start seeing that car everywhere—in your dreams, on your drive to work, and even parked in front of your favorite coffee shop.

But you don’t have thousands of dollars lying around. So, you do what most people do—you finance it. Next thing you know, you’re walking into the dealership, shaking hands with Billy Bob, and securing yourself a brand-new ride . . . and a car note.

What’s a car note? Well, most people just call it a car payment. But here’s how it works: When you finance a car, you don’t actually own the car. You’re borrowing money and telling the lender that you promise to pay back the amount they loaned you (plus interest) within a certain time frame. A car note (aka a car payment) is what you pay each month for that loan.

How Are Car Payments Calculated?

When you finance a car, calculating your car payment comes down to several things:

  • The current price of the car
  • Any trade-in value you have from a previous car
  • Any cash you put as a down payment
  • The total amount of the loan (the principal)
  • The interest rate on the loan
  • The number of months it will take you to pay off the loan (aka the loan term)

Sound confusing? That’s exactly what car dealers and lenders want. Because the more complicated the process, the more they can charge you. But let’s break it down so you can know exactly what you’re signing up for.

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Let’s say that new model you bought from Billy Bob runs $30,000. You don’t have an old car to trade in, and you have no money to put down, so you take out a loan for the full amount at a 4.09% interest rate (the average for a new car).1 You agree to pay that back monthly for the next 60 months—that’s $554 per month for the next 5 years. Wowza! Even if you were to trade in your current car for $4,000 and put down $500, you’d still be stuck with a $471 payment each month.

The dealership may also try to get you to lease a car, but it is not the same as actually buying a car. The monthly payments may be lower, but that’s because you only get to drive the car for a certain period of time. It’s basically a glorified rental car that you don’t get to keep! Trust us, leasing is definitely the most expensive way to drive a car—and you should steer clear of it.

How Much Is the Average Car Payment?

Right now, the average car payment is a whopping $575 for a new car and $430 for a used car. The average interest rate to finance a car? 4.09% for a new car and 8.66% for a used car.2 And those numbers are only getting higher thanks to rising car prices.

But just because something is average, it doesn’t mean it’s your best option. Let’s take a look at what that monthly payment means for you in the long run.

The Real Cost of a Car Payment

Remember that $30,000 car you bought (sorry, financed)? Well, after the five-year term you agreed to, you’ll end up actually paying $33,223 total. That’s over $3,223 more than the original price! You don’t have to be Mark Cuban to know that’s not a good deal.

The real kicker? Cars go down in value. Yeah, the dealer won’t tell you that your awesome new car will lose 60% of its value within the first five years!3 So by the time the new car smell wears off, you’ve paid $33,223 for a car that’s worth maybe $12,000.

Plus, if your car loses value faster than you make your payments, you’ll end up with an upside-down car loan on your hands—and boy, is that a mess to deal with!

Even though the total auto loan debt is at $1.44 trillion and auto loan interest rates continue to grow, people are still financing cars.4 Why? Because we’ve been conditioned to think taking on debt to get the coolest (or the “safest”) ride is normal. But normal is broke. The good news? There is a better way to get a car.

How Do You Get a Car Without a Car Payment?

So, now that you see what an unbelievably bad investment car payments actually are, let us introduce you to a better option: buying a car with cash.

Sounds radical, doesn’t it? You might think it can’t be done—that this kind of thing is only possible for people like Richie Rich. But you don’t have to be a millionaire to pay cash for a car.  
Here are some ways to have a car without having a car payment.

Buy a cheap, used car.

No more upgrading outside of your price range—it’s time to get something that actually fits your budget. Because if you can’t write a check for a car on the spot, you can’t afford it. Harsh, we know. But stick with us here.

What if you bought a cheaper car—nothing fancy—just to get around for 10 months? That way, you can have something to drive while you save for a better one. But that newer model is so cool! I have to get a car with heated seats. I can’t drive a clunker—how embarrassing! Look, it’s easy to come up with all the reasons why you need a specific car. But just because you think you “deserve” it doesn’t mean it’s worth going into debt for. All that matters is that your car gets you where you need to be, at least until you can save up for a better one.

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

Speaking of saving, if you take that $554 car payment you would’ve had and put it into your savings every month, after 10 months, you’ll have saved $5,540! Add that to the $1,500–2,000 you can get for your old beater car, and you have well over $6,000 to buy a new-to-you car with cash. That’s a major car upgrade in just 10 months—without owing the bank a dime in interest!

If you keep consistently putting the same amount of money away, 10 months later you would have another $5,540 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. You: 1. Car Debt: 0.

Keep your current car and invest the money.

Another option: Keep the car you have. If your current car is paid off and it isn’t giving you any major problems, you could just keep driving it. Crazy, right? Then you could invest the money you would’ve had as a car payment into a good mutual fund. With an 11% rate of return, you would have over $120,000 in 10 years! In 20 years, you’d have almost $500,000. And in 40 years? That mutual fund would be worth over $4.7 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’ll 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.

You Can Live Without a Car Payment!

We know the idea of not having a car payment isn’t as easy or as flashy as the car commercials make financing out to be. But with some hard work, a determination to stay out of debt, and some patience, your life could be dramatically different (in a good way) 10 years from now.

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. If you’re ready to ditch your debt for good, join a community of people who are taking control of their money with Ramsey+.

You’ll learn how to live a life free from debt, manage your money with confidence, and save for the future—so you can actually pay cash for your dream car (maybe sooner than you think)! Try Ramsey+ today for free. 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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