Why and How to Pay Cash for Your Next Vehicle

Cars are expensive. The average American spends almost $9,000 per year per vehicle on repairs, fuel, insurance, taxes, and car payments. Add on that cars rapidly depreciate in value and it is quick to see why decisions about purchasing a vehicle significantly impact your financial picture. But you aren’t reading this post to be convinced that cars are expensive; you already knew that. Rather, this article focuses on the costs of car ownership that you can control. Namely, this article shares how to eliminate car payments altogether by paying cash for your next vehicle.

First, why pay cash? Simply put, paying cash for a vehicle will yield significant long-term savings.  Below are four specific reasons.

Why to Pay Cash for a Vehicle

1. Interest is Expensive – Consider a $20,000 car purchase, which is well below what the average purchase price for a vehicle. Someone with good credit might get a 72 month (6 year) auto-loan for 5% interest. The borrower would then be subject to nearly $3,200 in interest payments over the life of the loan!

$20,000     x     5%     x     72 months     =    $3,200

Purchase Price          interest rate              term                  interest expense

 

2. 0% Financing is Costly After All - The words “free money” are often associated with offers for 0% financing on a vehicle purchase. Yet that money really isn’t free at all! What often goes unmentioned is that many dealerships increase their profits when a buyer finances the vehicle. In essence, dealerships bake the financing charge into the advertised price of the car. Cash buyers may even be able to reduce the sale price by offering to pay cash.

3. Financing Encourages a More Expensive Car – No doubt there is a psychological element to car buying. Financing our purchase encourages us to focus on our wants. Using our hard earned cash to buy a car encourages us to focus on our needs. Remember, we already established that a car is a quickly depreciating investment. Therefore, it is better to stick only to what you need.

4. Better Uses For Monthly Car Payment – According to a study done by Experian Automotive in 2015, the average auto payment by Americans is $493 per month!  What could you do with this money if you no longer had a car payment?  Sure a portion of it should be saved for your next vehicle but the rest could be used to save for retirement, pay down student loans, or given generously to organizations or people that you care about.  Don’t each of these things sound more exciting than paying off a car that is going down in value each year?

How to Pay Cash for a Vehicle

1. Get Out of your Current Loan – Be aggressive about paying off your current loan and eliminating the payment. If you stretched too far for your current vehicle then consider selling your car and getting into one you can pay off quickly or even buy outright.

2. Put the ‘would be’ Car Payment into Savings – Now free from a car payment, you can focus on saving by allotting the would be car payment (and any additional funds) to a liquid savings account.  I highly recommend opening a separate savings account – that has no minimums or fees – to specifically save for this purpose. Consider even going as far as titling the account “Next Vehicle.”

3. Set a Goal and Make a Plan – Don’t listen to anyone telling you to spend a certain percentage of your income on a car. No financial picture is exactly alike. Therefore, there are no magic formulas for car buying. Instead, identify what you and your family’s needs will be while considering what you are able to save each month. Target an attainable price range and timeframe that fits both. For example, if your goal is to purchase a $9,000 vehicle five years from now, then set up an automatic monthly transfer of $150/month to your savings account titled “Next Vehicle.”  Now is also an especially important time to pray about this decision. Ask God to guide this process and give you wisdom on the right type of car to seek after.

4. Shop Multiple Vehicles; Including at Least One Used Car – When the time comes, look at vehicles from multiple dealers or sellers. Not getting attached to one car helps you maintain a logical approach rather than an emotional one. It also helps with negotiating as it is easier to walk away from a deal if need be. Having at least one used vehicle in the mix will force you to deeply consider and analyze whether a new or used car is right for you.

A helpful tip: don’t be afraid to look online at other markets! The same car may cost significantly less in another city. It may be worth it to travel out to get the car and drive it home. Plus, if it’s a used car in a warm climate then it is likely that the car wasn’t susceptible to harsh winters. Rust and other weather related issues should be less of a concern.  Two years ago I flew down to Texas with a friend to buy my family’s minivan off of Craigslist for this reason. I even got to drive through hail and a tornado on the way back!

5. Negotiate before Buying - Cash buyers have much more bargaining power than those buying on credit. You’ve done the hard work to get into this position. Negotiate for the best possible price on each vehicle you are considering.

6. Start Saving For the Next Vehicle – Enjoy being debt free and having years to save for your next vehicle!

 

What about you?  Have you ever been able to pay cash for a vehicle?  Would you like to be able to do so?

Cars are big commitments that drastically impact your overall financial picture. Car purchases should therefore be considered closely and in the context of wider financial plan. Wacek Financial Planning helps individuals understand all areas of their finances, including big purchases like vehicles. You’ll feel empowered to make smart decisions towards a healthy and Christ-centered financial outlook. Let’s talk more today about a financial plan that is right for you.

About Wacek Financial Planning

Founder, Ben Wacek, is a fee-only, Certified Financial PlannerTM who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective, using Biblical principles.  If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.

 

Photo courtesy of  Pawel Bukowski of Snap.io

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