How to STOP Financing Your Vehicles

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How to stop financing cars

Many people pay more than sticker price for their automobiles because they finance the vehicle and pay interest on the debt every month.  I used to be one of those people… never again.

What follows is a quick summary of how you can STOP financing your vehicles and start paying cash.  Doing so will help you save money, lower your debt burden, and give you true ownership and control over your purchases.

  1. Stop thinking you have to borrow money to buy a car. Most finance problems are thinking problems.  If you think buying a car with cash is not doable, then you will probably never do it.  Believe me, it is doable… starting thinking it is.
  2. Aggressively pay down existing auto loans. If you can afford extra debt payments, make them.  If you have a lump sum amount saved that you can put toward your existing auto loan, do it.  If you have to sacrifice to start making extra payments, then consider lowering your cell phone plan, cutting cable, or making any other sacrifice you can think of to help repay your loan faster.
  3. Continue saving after loan is paid off. After you pay off your existing loan, continue putting that amount away every month.  The difference is… rather than paying the financing company, you’re paying yourself.  Create a separate savings account called “Next Auto Fund” and begin funding it every month.  You can also use an envelope and stash the money there.
  4. Buy used. Many new cars are simply not worth the extra cost.  Next time you purchase a vehicle consider something that is at least a year or two old.  Betsy and I usually settle on cars that are no more than $6,000 and are working to fund our “Next Auto Fund” with $12,000 to cover both our vehicles.
  5. Don’t forget to save for repairs and maintenance too. Alongside our “Next Auto Fund” we also have a “Auto Repair & Maintenance Fund”.  After speaking with my auto mechanic, we decided that $100/vehicle/month is a good basic number to use for funding this account.  Betsy and I have been saving $200/month for over a year now and it has worked phenomenally.

Using these tips and some good old fashioned discipline you can stop financing vehicles and start paying cash.  Don’t forget point number 5 – it is key to your success!  If you don’t create a maintenance savings then you’ll undoubtedly end up tapping into your “Next Auto Fund” to pay for repairs… which defeats the whole purpose.

My history with financing cars

My first automobile was a 1987 Pontiac Sunbird.  I loved it.  For me it was the best car in the world… and to get it, I was willing to go into debt for the first time.

I was 17 years old and had $700 cash savings to use toward the car – but it cost $1,700.  I couldn’t get a loan without a cosigner and my dad wouldn’t do it so I hit up my grandpa… he obliged and we signed on the dotted line for a $1,000 loan.  I paid $100/month for 10 months (along with an extra interest payment the 11th month) until it was paid off.

That is how I started financing vehicles.

After the Sunbird I financed two other vehicles – both used.  I’m 35 and have owned these 5 vehciles:

  1. 1987 Pontaic Sunbird – Paid $700 cash and financed $1,000.
  2. 1991 Chevy S-10 Pickup – Gift from my amazing mother Kathy.
  3. 1988 Chevy Sprint – Paid $1,300 cash.
  4. 1996 Ford Mustang – Financed $6,000.
  5. 1999 Jeep Cherokee – Financed $7,200.

Paid off and saving

Now-a-days we have both our vehicles paid off and have around $4,000 saved for our next vehicles.  As mentioned above, we also fund our repair and maintenance account with $200 each month to cover expected care costs of the vehicles.

Next time we go to purchase a vehicle, rather than paying $7,000 for a $6,000 car… we plan to pay closer to $5,000.  Because like Dave Ramsey always says… 90 days is NOT the same as cash!



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1 Jason from SocialCheap.com

I’m going to buy my first used car this weekend (2008 Lexus IS). Taking your advice!

2 Thomas

I can definitely relate to you on this one, Matt. I too once thought finanicing was the normal and perfectly acceptable way to go about buying cars. I was also 17 when I financed my first car. The debt chain goes as follows:

2003 – Used 1997 Toyota Camry – Zero down, Financied $10,000 (at 15% interest, OUCH!; refinanced to 2.99% six months later)
2005 – Used 2005 VW Jetta – $1,000 down, Financed $15,000 (at 5%)
2006 – New 2006 Toyota Prius – $2,000 down, Financed $28,000 (4.25% over seven years, OUCH!)
2006 – Used 1995 Toyota Camry – Paid $3,000 cash (starting to catch on)
2007 – New 2007 Toyota Yaris – $2,000 down, $5,000 trade, Financed $8,000

I refinanced the Yaris once in 2008 to a shorter term and again in 2009 to a lower interest rate. I paid the darn thing off in December 2010 and haven’t had a car loan since. And never will again! My wife and I have her minivan, which we purchased for cash, and the Yaris. We’re planning to replace her van once it reaches the (gasp) 300,000 mile mark, which we’re thinking will be in about five years. If we do the same for the Yaris, it will likely last another ten years.

How are we planning to accomplish this? We’re going to keep up on the regular maintenance and keep socking away money into the car replacement fund. We do have a car maintenance category in our budget, but it’s usually reserved for the regular scheduled maintenance such as oil changes, tune ups, etc… (maybe 25 or 50 bucks a month). We used to keep a separate “major car replair emergency fund” category, but we thought it was a bit overkill (just our opinion). We tend to think of major car repairs as more of an emergency fund item. Also, being that we are now debt free (woot woot!), we are considerably more flexible in our monthly budget and could likely cover all or most of a major car repair if need be.

Cheers,
Thomas

3 Jon | Free Money Wisdom

I agree, financing is not fun. I just finished paying my Acura TL off 52 months early haha. I don’t plan on financing another car ever again, especially since I plan on driving this one into the ground!

4 Beckey

My husband hates his 2003 Jeep Liberty (ended up with it in his divorce with ex) and we’ve already discussed just keeping up to date with maintenance and necessary work on it to hopefully keep it another 5 years. It just hit the 100K mark on mileage and probably needs $1,500 in work right now but we are going to do what needs to be done. He doesn’t want another payment once the Jeep is paid off in 8 months, so the monthly payment will start going into our Replacement Auto fund so we will be prepared to replace it. I have a 2005 Honda CR-V with just over 60k miles on it and I plan on keeping that baby at least 6-10 more years, it will also be paid off in the next year so that monthly payment will roll into our student loans and remaining credit card balances.

5 Tim @ Faith and Finance

I hope to never finance another car. After I pay off my current auto loan, I’m putting aside cash for repairs/new car fund.I think everyone who even THINKS about getting a car should read this article. In fact I’m forwarding it to my friend right now 🙂

6 Jose

Great article by the way – I finished paying for my 2005 Scion xB one year ago and NEVER again will I finance a car again- its a complete waste of money for you always end up upside down due to car’s depreciation rates. If you finance your auto insurance also goes up. I plan to run my “box” to the ground.
I always financed cars and I learned my lessons the hard way. I do want to make a few recommendations though if you plan to keep your car a long time – first off maintenance, maintenance and maintenance don’t ignore your car – especially newer ones with everything computerized. Second choose a car with a great track record of reliability (Consumer Reports is the bible on this one.) Another suggestion – the less techno gadgets on the car the cheaper it is to repair – avoid European cars ( I had a few) maintenance and repairs are a FORTUNE!!!

7 Matt Jabs

Congrats on paying off the Scion, and congrats on your decision to quit financing vehicles! I agree wholeheartedly with your advice to avoid technologically complex vehicles… that is why I own a Jeep Cherokee. 🙂 I’m able to do some my own auto maintenance because of it’s simplicity.

8 Ronald A

Very goods points on the cost of buying a car, many finance companies try to hide the actual cost of the loan.

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