Pay Less for Your Car

​Over the past several years, it has made sense to finance your vehicle purchase since interest rates were so low, and at times rates were 0% or near zero…

​However, things have changed with rates climbing considerably.
 
We’ve long recommended that the way to purchase vehicles is with cash, and that fell on deaf ears when folks could finance cars at 0%. But now that vehicle loan rates are hovering in the 6%-9% range, paying cash is looking a lot better.

So how can you pay less for your car?

The key is to earn interest while you save for your car purchase, rather than paying interest from financing your car purchase.
 
Let’s look at an example. Financing the purchase of a $30,000 car at 7% interest over 5 years would equal a $594 monthly payment for a total outflow of $35,642. Part of that payment is for the $30,000 cost of the car and the remaining $5,642 is interest. Alternatively, if you deposit $439/month into a savings account earning 5% interest, you would have the $30,000 purchase price saved.
 
Because of the interest accumulation, the actual amount deposited into the savings account was only $26,340. In essence, your $30,000 car only cost $26,340 ($439 X 60), which is $9,302 less than the $35,642 you pay with financing. Another way to look at the cost of borrowing is comparing the monthly financed payment of $594 to the monthly savings deposit of $439. A $155/month payment difference adds up quickly. Other factors, like taxes, enter into the comparison, but the example illustrates the benefits of saving for major purchases.
 
If you’re not currently paying cash for your cars, consider making car payments to yourself now so that when the time comes for the next vehicle purchase, you can write a check!
 
For many of us, automobiles are the single biggest purchase we make other than our home. However, these saving guidelines apply for any major purchase that you anticipate within the next five years or so - home repairs, remodeling, etc.
 
If you need to make a major purchase quickly, and do not have the time to save the entire amount, sometimes borrowing is the only option. Once you have paid off that loan, apply the amount of your previous monthly payment towards a major purchase savings account. Over time, you’ll finance less and less and ultimately eliminate that nagging consumer debt.