Car Guide

 

Alright, we have to talk about car loans. Like we mentioned earlier, the best way to buy a car is with cash. But more and more folks are choosing to go into debt for their cars—and the numbers are downright frightening.

National auto loan debt now stands at $1.66 trillion—and has edged ahead of student loan debt at $1.64 trillion.¹ And it’s not just the total debt that’s ballooning—more than 80% of new cars and 37% of used cars are financed. That means most people aren’t paying cash for their vehicles—they’re borrowing for them.²

Houston, we have a problem! Whether you’re thinking about buying a new set of wheels with a car loan or you already have one, you need to know how they work—and why they’re always a bad idea. 

Why You Don’t Want a Car Loan

First, let’s cover the basics. A car loan is made up of three main parts:

1. Principal: This is the total amount of the loan (minus interest).
2. Interest: This is your lender’s favorite word. Interest is the amount of money your bank or lender tacks onto your bill each month in exchange for giving you their money.
3. Term: This is the amount of time you have to pay back the loan.

Today, the average new car loan is about $41,983 with a monthly payment of $749 (which includes the principal and interest) over an average loan term of 69 months.³

That means you’d be stuck with monthly payments for almost six years. That’s crazy! Not only that but, at the end of those six years, you’ll have shelled out a little over $51,000 for a car that originally cost around $42,000—and by then it’ll be worth half that.

Want to see how much your own car loan is really costing you? Use our Auto Loan Calculator to see how fast you can pay it off and how much interest you’ll save by knocking it out early.

Did you know? Of Ramsey car owners surveyed, 43% acquired their primary vehicle without any financing!

How to Get Out of a Car Loan

1. Pay off the loan. After all, you did sign your name on the dotted line. It’s time to get gazelle intense and work harder than you’ve ever worked before to pay off this sucker as fast as you can.
2. Sell the car. When it comes to your car’s value, time is not on your side—especially if you bought it brand-new off the lot. And if you're upside down on the loan (which means you owe more on the loan than what your car is currently worth), you've got to pony up the difference.

If you don’t have the cash to pay off the loan and get the title from the lender, you may have to get an unsecured loan, pay off the difference, and then attack that loan with everything you’ve got.

Getting rid of your car loan once and for all is going to take a lot of work, but you can do this! A great way to get started is by using EveryDollar. This free budgeting app helps you plan where every dollar goes—so you can find extra money in your budget and throw it at your car loan to pay it off fast.  

What About a Car Lease?

With a car lease, you’re basically renting the car—with the option to buy the car at the end of the lease. And anyone with some basic math skills and a calculator will tell you that leasing a car is the worst possible way to get a car. It’s 100% stupid, 100% of the time.

Remember how we mentioned that new cars drop in value the moment you drive them off the lot? Well, your car lease payment is designed to cover that loss in value and provide the dealer with a profit through the interest you pay. When they get the car back, you’ll have paid them more than the car has depreciated during that time.

How do you get a deal in that? Spoiler alert: You don’t. If you have a car “fleece,” you’ve been ripped off.  Dealer-ships are like casinos—the house always wins.