Josh Elledge - Chief Executive Angel
Pay cash for new cars to save a fortune
Every year about this time people begin to ponder: “Will my car make it through another winter? Should I buy a different car to avoid possible repairs?” These are valid questions but they all lead to a big financial issue: taking on new debt you don’t need. Here’s how to pay cash for new cars to save a fortune instead.
It’s not difficult to see how repairing the car you already own is, by far, the most financially smart you can be regarding vehicles. Even a very large repair bill of $1000 is a far cry from taking on new debt of $10,000 or more. So why do we often opt to buy instead of fix? One big reason is fear. We worry that our car isn’t going to be reliable enough. The other reason is plain boredom. We grow weary of the small issues with the same old ride. But cars are built to last and even if the odometer is reaching 100,000 miles, that car is only halfway through its life expectancy.
Before you buy a new car, I want you to do two financially wise things:
- Fix what you can to buy you time to save up. Find a truly honest mechanic or repair shop and have them tell you what really has to be repaired and what isn’t worth fixing but is still safe. Talk to people and see where they’ve gone and how they were treated. Compare pricing. If you think you might need the brakes done, for example, make a few phone calls and get some general estimates. Garages don’t like to give 100% estimates before seeing a vehicle but they should be able to give you a ballpark, based on your vehicle’s make and model. They can look up the price of parts and supplies and estimate the labor time. That will give you a general idea, with the understanding that it’s not set in stone. If a place won’t even give you an estimate, that’s a red flag. Not only will an honest repair shop give you a ballpark figure and not gouge you, they will tell you if you can do without some repairs.
- Start saving immediately to replace your vehicle and pay cash. Paying cash not only prevents taking on debt, it gives you negotiating power. When you’re paying cash, there is the guarantee of the sale for the dealer because it’s not based on a credit approval. That creates a motivated seller and gives you the upper hand in the negotiation.
Here’s how to be ready to pay cash for your next car…
Create a car fund
If you believe you could handle a new car payment (or possibly a slightly higher payment if you already owe on your vehicle and figure you’ll trade it in), then you should be able to start saving what you would pay. If you cannot consistently put away a car payment in the bank for several months, you cannot realistically take on a payment anyway. Not that you should. I want you to never have a car payment again!
Instead of paying on a loan, save every month, in a special account, the amount you would send to the bank. You’ll be motivated by how fast it can add up. Plus, none of the money you’re putting away is going toward interest like it would on a car loan. You’re already ahead in owning your next car outright when all your money is for the vehicle and not for the bank.
But what if you need a car right now and have no cash?
In that case, you need to be smart about which car you buy. Let's say your bank approves you for a $25,000 auto loan. For a five year loan at five percent interest, your monthly payment would be $471. But you could (and should) get a good used car for $5,000 instead. With that car, your monthly payment may be only a hundred dollars or so.
However, you want to pay off this car quickly, so you're going to send in the $471 you would have spent on the $25,000 car. With this payment amount, you'll have paid off your $5,000 loan in less than a year. And you’ve now got a car that will get you through as you continue to save for a better one.
Just keep putting that $471 aside every month for the next four years (the same length of time you would have paid on the $25,000 loan), and you'll have over $22,000 in cash for a new car. Plus you'll have saved more than $3,300 in interest and have any remaining resale value from the $5,000 car. Why would you ever want to finance a car again?
