You ’ ve credibly heard that before, right ? Or possibly you ’ ve said it to yourself—to justify getting that bright, newly car. Hey, we get it. cipher likes having a car payment. But are they equitable a way of life, like filing your taxes and doing your laundry ? Spoiler alert : They ’ ra not .
Let ’ s lecture about how car payments actually work—and what your options truly are ( yes, there ’ s more than one ) before you get behind the wheel .
What Is a Car Payment?
Let ’ s say you have your eye on a brand-new car, one that you actually, actually want. You start seeing that cable car everywhere—in your dreams, on your drive to work, and even parked in front of your darling coffee denounce.
Reading: The Truth About Car Payments
But you don ’ t have thousands of dollars lying about. so, you do what most people do—you finance it. following thing you know, you ’ re walking into the franchise, shaking hands with Billy Bob, and securing yourself a brand-new ride. .. and a car note .
What ’ s a car note ? Well, most people just call it a car payment. But here ’ s how it works : When you finance a car, you don ’ thyroxine actually own the cable car. You ’ re borrowing money and telling the lender that you promise to pay back the sum they loaned you ( plus pastime ) within a certain time frame. A cable car note ( aka a car requital ) is what you pay each calendar month for that lend .
How Are Car Payments Calculated?
When you finance a car, calculating your cable car payment comes depressed to several things :
- The current price of the car
- Any trade-in value you have from a previous car
- Any cash you put as a down payment
- The total amount of the loan (the principal)
- The interest rate on the loan
- The number of months it will take you to pay off the loan (aka the loan term)
phone confusing ? That ’ s precisely what car dealers and lenders want. Because the more complicated the procedure, the more they can charge you. But let ’ s dampen it down so you can know precisely what you ’ re signing up for .
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Let ’ s say that newfangled model you bought from Billy Bob runs $ 30,000. You don ’ thyroxine have an old car to trade in, and you have no money to put down, so you take out a loan for the broad sum at a 4.09 % sake rate ( the average for a newly cable car ). 1 You agree to pay that back monthly for the future 60 months—that ’ mho $ 554 per month for the adjacent 5 years. Wowza ! tied if you were to trade in your current car for $ 4,000 and put polish $ 500, you ’ d however be stuck with a $ 471 requital each calendar month .
The franchise may besides try to get you to lease a car, but it is not the same as actually buying a car. The monthly payments may be lower, but that ’ mho because you only get to drive the car for a sealed menstruation of time. It ’ s basically a laud rental car that you don ’ thymine get to keep ! Trust us, leasing is decidedly the most expensive way to drive a car—and you should steer clear of it .
How Much Is the Average Car Payment?
correct now, the average car payment is a sock $ 575 for a new car and $ 430 for a use car. The modal pastime rate to finance a car ? 4.09 % for a raw car and 8.66 % for a use car. 2 And those numbers are only getting higher thanks to rising car prices .
But good because something is average, it doesn ’ metric ton mean it ’ s your best option. Let ’ s take a attend at what that monthly payment means for you in the long run .
The Real Cost of a Car Payment
Remember that $ 30,000 car you bought ( good-for-nothing, financed ) ? Well, after the five-year term you agreed to, you ’ ll end up actually paying $ 33,223 sum. That ’ sulfur over $ 3,223 more than the original price ! You don ’ t have to be Mark Cuban to know that ’ s not a good deal .
The very kicker ? Cars go down in prize. Yeah, the principal won ’ thymine tell you that your amazing modern car will lose 60 % of its value within the first five years ! 3 so by the time the new cable car smell wears off, you ’ ve paid $ 33,223 for a car that ’ sulfur deserving possibly $ 12,000.
Plus, if your cable car loses value faster than you make your payments, you ’ ll conclusion up with an inverted car loan on your hands—and boy, is that a mess to deal with !
tied though the total car loanword debt is at $ 1.44 trillion and car loan pastime rates continue to grow, people are however financing cars. 4 Why ? Because we ’ ve been conditioned to think taking on debt to get the cool ( or the “ safest ” ) drive is normal. But convention is break. The good news program ? There is a better way to get a car .
How Do You Get a Car Without a Car Payment?
so, now that you see what an unbelievably regretful investment car payments actually are, let us introduce you to a better option : buying a car with cash .
Sounds radical, doesn ’ t it ? You might think it can ’ metric ton be done—that this kind of thing is only possible for people like Richie Rich. But you don ’ t have to be a millionaire to pay cash for a car.
hera are some ways to have a car without having a car payment .
Buy a cheap, used car.
No more upgrade outside of your price range—it ’ mho time to get something that actually fits your budget. Because if you can ’ thyroxine write a check for a car on the spot, you can ’ thymine afford it. Harsh, we know. But stick with us here .
What if you bought a cheaper car —nothing fancy—just to get around for 10 months ? That way, you can have something to drive while you save for a better one. But that newer model is sol cool ! I have to get a car with heat seats. I can ’ deoxythymidine monophosphate drive a clunker—how embarrassing ! Look, it ’ mho easy to come up with all the reasons why you need a specific car. But merely because you think you “ deserve ” it doesn ’ thymine bastardly it ’ mho worth going into debt for. All that matters is that your cable car gets you where you need to be, at least until you can save up for a better one .
Save what you would’ve spent on your car payment.
speak of saving, if you take that $ 554 car payment you would ’ ve had and put it into your savings every calendar month, after 10 months, you ’ ll have saved $ 5,540 ! Add that to the $ 1,500–2,000 you can get for your old beater car, and you have well over $ 6,000 to buy a new-to-you car with cash. That ’ s a major car ascent in merely 10 months—without owing the depository financial institution a dime bag in interest !
If you keep systematically putting the lapp total of money aside, 10 months late you would have another $ 5,540 to put toward a cable car. You could probably sell your current $ 6,000 vehicle for about the same price you paid for it 10 months ago. now you have more than $ 11,000 to pay for a new-to-you car—just 20 months after this unharmed process started. You : 1. car debt : 0 .
Keep your current car and invest the money.
Another option : Keep the car you have. If your current car is paid off and it isn ’ thymine giving you any major problems, you could precisely keep driving it. Crazy, right ? then you could invest the money you would ’ ve had as a car payment into a good reciprocal store. With an 11 % rate of reappearance, you would have over $ 120,000 in 10 years ! In 20 years, you ’ d have about $ 500,000. And in 40 years ? That reciprocal fund would be deserving over $ 4.7 million !
Those numbers will make your head spin, but it actually just comes down to bare mathematics. The less money you ’ re spending on your cable car every month, the more money you ’ ll have to put into other more significant things—like paying off any other debt you have, putting away money for your kids ’ college fund, saving money for the retirement of your dreams, and thus a lot more.
You Can Live Without a Car Payment!
We know the idea of not having a cable car payment international relations and security network ’ triiodothyronine as easy or angstrom brassy as the car commercials make financing out to be. But with some hard work, a decision to stay out of debt, and some patience, your liveliness could be dramatically different ( in a good direction ) 10 years from nowadays .
Whether you ’ ra struggling to make car payments each calendar month or you ’ ve got student loans up to your eyeballs, all debt will weigh you down and keep you from achieving your money goals. If you ’ re cook to ditch your debt for good, join a community of people who are taking control of their money with Ramsey+ .
You ’ ll learn how to live a life absolve from debt, manage your money with confidence, and save for the future—so you can actually pay cash for your ambition car ( possibly sooner than you think ) ! Try Ramsey+ today for free. Stop making payments. Start making advance .