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The Truth About Financing a Car

Buying a car can sometimes be a painful process, especially when your unusually faithful car will never see another highway again. Yep, your beloved truck, Floyd aka Old Faithful, stalled out on you for the last time, so . . . what now?

For most people, a trip to the local dealership or used car lot to finance a new car is first on the to-do list. But is financing Floyd’s replacement really the best option?

Listen: if you have a car payment, you’re not alone. In fact, it’s absolutely normal. But we want to flip the script on what normal is—because in today’s world, normal is just another word for broke.

What Does It Mean to Finance a Car?

When it comes to buying cars, people believe that car payments really are their only option. You’ve heard it said before: The only way I can ever own a car is by financing. I’ll never be able to save up enough to purchase it on my own. That’s where we come in. But before we tell you how to get a new-to-you ride with straight cash, let’s tackle the topic of financing. 

Financing a car is essentially signing your John Hancock on a lease agreement or contract. Basically, it’s just a fancy “IOU” in the form of monthly payments to the dealership in exchange for driving off the lot in a new or new-to-you car. Sounds pretty easy, right? Maybe on the surface.

What those smooth-talking salesmen don’t tell you is that, while financing a car will satisfy your need for transportation right now, it’s also the most expensive option.

Not only will you be paying toward the principal of the vehicle (plus taxes and fees), you’ll also be paying toward the annual percentage rate each month. And if they’re good at their job, they’ll squeeze every nickel out of you they can. Yikes! More on that later.

Are There Different Ways to Finance a Car?

There are two major ways to finance a car: leasing and direct financing. Both are popular choices, but both are equally notorious for eating your paycheck each month.


Believe it or not, “fleecing”—oops, we mean leasing—is the most expensive way to drive a car. But of course, your friendly neighborhood car dealer would never tell you that—that’s why we’re here.

Leasing a car may sound like a great idea, but in reality, you’re basically paying to drive a glorified rental car. Sure, the monthly payments on the lease are lower than they would be if you were to directly finance the car, but your hard-earned cash is really just padding the dealer’s pockets until the end of the lease term.

A typical lease payment includes the expected depreciation or loss of value of the car (during the lease period), a rental charge, taxes and fees.1 But unless you decide to purchase the car at the end of the lease, you’ll have to give it right back to the dealer.

Oh, and don’t forget: There’s a mileage cap on lease agreements. So, if your job has you driving across the country on a weekly basis, you may want to think twice before you sign on the dotted line. Not only that, you need to make sure to follow the manufacturer’s recommendations for upkeep to keep it in pristine condition . . . or you’ll pay for it later.

Direct Financing

So, you’ve had your eye on that brand-spankin’-new 2019 Toyota 4Runner. It’s sleek, it’s rugged, and it’s great for that off-roading trip you’ve been dreaming about. Plus, the friendly salesman said he can give you a steal of a deal if you drive it off the lot today!

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Dealerships absolutely love offering their car financing options to potential buyers. With seemingly great incentives, like “zero down and zero interest for the first three months,” we get why it gets harder and harder to hop back in your old hooptie and drive away from that “deal of a lifetime.”

But before you get too far along in your new car fantasy, let us remind you that “zero down” just means a bigger loan, and “zero interest” doesn’t mean no interest—it’s delayed interest.

So, let’s say you fell for “Truthful Tom’s” sales pitch and went all-in for that 4Runner of your dreams. The vehicle costs $35,000. You didn’t put a down payment on it, and your interest rate is a standard rate of 6.13%. Your new car payment might just be somewhere in the ballpark of $700 per month. Yikes!

How Can I Get a Car Without Financing?

Here’s a little piece of advice: If you can’t afford to buy the car right now with cash, you can’t afford the car. And no matter where you’re from, cash is king. That’s where delayed gratification and saving (like it’s your job) comes in.

Did you know the average person who has a car payment is not a millionaire? (Makes sense, right?) In fact, the average person who buys new cars isn’t, either.

In Everyday Millionaires, we found that “the average millionaire drives a four-year-old car with 41,000 miles on it. And eight out of ten millionaire car buyers drive it away debt-free without carrying a car payment behind them.”

“It’s time to start making purchases that are going to lead you to wealth in a way that they’re going to lead you to wealth. And the best way to gauge that isn’t by talking to the car salesman. It’s by talking to the millionaire.” — Dave Ramsey

So, if you were to save that $700 monthly payment (instead of giving it to the dealer) for just one year, you’d have $8,400. With that money, you can buy a dependable, used car with straight cash! And if you were to drive that car for a year and keep saving that $700, you’d have another $8,400.

This is called setting up a sinking fund—a way to save up for a specific purchase by setting aside money each month. And it's interest free. Heck. Yes. 

After you've got your sinking fund full, sell that car for what you paid for it and purchase a $16,800 vehicle. Drive that nicer car for two years, trade it in along with that extra $16,800 you saved up, and purchase that 4Runner—probably at a discount! Oh, and make sure you always negotiate. Don’t underestimate the power of cash!

But wait a minute—did you catch that? It only took you four years to get your dream car. If you had financed that car, you’d still be paying some hefty monthly payments (plus interest) to the dealership, and you’d still have an entire year of payments left!

Stop dreaming about the car and start saving. How? It's all about the budget. Be intentional about putting money away. Every. Single. Month. It's easy with the sinking fund feature inside our free budgeting app, EveryDollar. You'll set your total savings goal, plan what to set aside each month, and keep up with it all—right in the palm of your hand.

So jump into EveryDollar, start saving, and make that dream car a reality.

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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. Learn More.

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