How to Have No Car Payment – Ever

by Neal Frankle, CFP ®

Do you desperately want to pay off your car loan and have no car payment? Good for you. Think of how great it will be when you no longer have to send that payment in every month. Will you invest more for retirement? Pay off other bills? Whatever you do with that monthly savings, paying off your car loan and never taking one out again is plain smart.

I’m going to tell you exactly what you can do to never need a car loan ever again and say “goodbye” to those car financial services companies once and for all. But first, we need to get on the same page. (Have patience…..I promise I’ll answer the question.)

Buy Transportation – Don’t Buy a Car

Rather than think about the cost of buying, maintaining and owning a certain car, think about your cost of transportation. Your cost of transportation includes:

  • Fuel
  • Maintenance
  • Depreciation

Fuel and maintenance are no-brainers. No matter which car you drive, you incur these expenses because automobiles require fuel and upkeep. Some cars cost more to fuel and maintain and others cost less. If you do a little homework and buy smart, this doesn’t have to be a problem.

But depreciation is often overlooked and that’s a shame because this is the key to getting out of “car loan purgatory”. Depreciation is the cost to replace your car once it “runs out of gas” for the very last time. Sooner or later, your jalopy is going to go “kaput” or you are going to decide you need to replace it. Either way, as cars get closer to that “parking lot in the sky”, its value declines to reflect its depreciation. This is true even if you lease a car. You still pay for the depreciation.

A car that cost $20,000 5 years ago may only be worth $11,000 today. That $9000 difference is one way of approximating actual depreciation.

When you think about buying a car, budget in your depreciation cost (to estimate your true ownership cost). You do that by considering the cost of the car when you buy it and estimate the amount you will receive when you sell it. Then divide that number by the number of years you are going to keep the auto. That is your average annual depreciation cost.

Assume you buy a car today for $22,000 and plan to keep it for 3 years before you buy another new one. In 3 years, you estimate that you’ll be able to sell the car for $13,000.

So over 3 years, your depreciation will be $9000 or $3000 per year. That depreciation number is important. In fact it’s vital to wrap your head around this number if you want to be car loan free forever.

Why? Because that $3000 is a real cost that you pay every single year. But you don’t think about that when you take your car to the shop or to the gas station. You “pay” for depreciation when you buy your next car. And as I said, this is the key to your freedom.

Why? Because if you slash your depreciation cost you slash the cost of transportation. And if you cut that cost, you won’t need a car loan.

One great way to make car loans a part of your history instead of your future is to start saving now for your future car. Why not open an account at CIT Bank? They will set up an automatic savings account and they pay very high rates. How great will it feel to have the money saved up before you even go car shopping?

Lets’ take a closer look at this. If you want to cut your depreciation costs, you have two ways to do so:

  • Increase the useful life of your car (drive it longer)
  • Replace your expensive car with a less expensive option ( buy a slightly used one)

Let’s go back to that new car you buy every three years. Remember that your depreciation cost is $3000 a year. What if instead of buying it new, you bought it for $12,000 after your neighbor drove it for 3 years? Now let’s recalculate your depreciation cost.

Assume you determine that you could drive the car for 3 years and then sell it for $7000. So your depreciation over that 3 year period would be $5000 rather than $9000. That number is lower because new cars depreciate much faster than older cars.

Now, if we take that $5000 and divide it by 3 your depreciation cost drops to $1660 per year. That’s a nice savings of over $1330 per year. And if you drive the $12,000 car for 8 years and then sell it for $4000, your depreciation cost slides down to $1,000 a year. That saves you $2000 a year compared to driving a new car every three years. How cool is that?

It’s true that you may have higher maintenance costs with an older car but as long as those costs are lower than your annual savings, you’re in good shape.

How does this help you get out of needing a car loan?

In the first place, you are spending $12,000 for the car rather than $22,000 so it will be easier for you to come up with that lower number without getting a loan. Even if you do need a loan this time around, it will be easier to get out of debt fast with a lower starting balance.

Second, your depreciation cost is much lower so it will be easier to put together a sinking fund (put money aside so you have money to replace the car when need be). With a sinking fund in place, you won’t need a car loan next time you need new wheels.

You can see that by spending less for a car, buying a slightly used car and driving your car longer, you’ll be taking great strides toward deflating your cost of transportation. If you put these strategies together with setting up and funding a sinking fund, you won’t need a car loan ever again.

Do you have a car loan? What are you going to do to make that a part of your past?


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{ 2 comments… read them below or add one }

Derek January 18, 2013 at 5:33 PM

Drive Free, Retire Rich


Bridget January 16, 2013 at 4:45 PM

I just want to pay off my car note. It drives me crazy to have to pay a note every month. Since I am in real estate I need a dependable car.


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