How to pay cash for your next car

I’m a big fan of avoiding debt as much as possible. But what about those times when you can’t? One example that comes to mind is buying your first car. (Or your next car, depending on where you currently are in the cycle of life).

If you currently have a car loan (or are about to take one), this post contains tactics that can help to make it the last car loan you’ll ever need. 

Do you really need a new car?

First, truly assess whether you need a new car – or a car at all. Can you walk, bike or use public transportation? If your household currently has more than one car, is it possible to share – even for a few months or a year? Do you use a car infrequently enough that you could rely on a ridesharing service such as Uber or Lyft? Doing so could save you the cost of a car, maintenance and car insurance. Can you squeeze another year (or two or three) out of the old car even if it means investing in some basic maintenance?  

If you really need a new car, avoid buying a more expensive car than you need. Automobiles are not an investment. And no matter what marketing hype the automakers are pushing: Cars are not an extension of who you are. They do not make you someone you aren’t. They do cost a lot of money and their value depreciates quickly. On average, a new car loses 20% of its value before you get it home. A car loses 60% of its value after you own it 5 years, which is why you might consider buying a used or “pre-owned” vehicle as well. Regardless, avoid the upsell. Know the difference between wants and needs. Only buy features you need.

Minimize debt

Whether you’re buying new or used, your first goal should be to minimize the amount of debt you are taking on. Ironically this will better position you for your next auto purchase. Instead of focusing on the monthly payment, pay attention to the total cost of the car, the total cost of the debt and the length of the loan. If possible, get pre-qualified on your financing before you shop so you aren’t at the mercy of the dealer and whatever financing it’s offering.

Aim for a three-year loan or less. Avoid anything 5 years or longer. If you’re looking to trade in a car that you still owe on, avoid doing that. If you don’t, you’ll be in a situation where you are upside down on your loan and are likely to remain so for the foreseeable future. When you roll an old car loan into a new car loan you are continuing to pay for something you no longer own.

Keep the car…for years

Assuming you’ve consulted many smart tips for buying a car and have done the deal, now what? Keep that car until you’ve paid it off. Then keep that car AND keep paying yourself the same amount of the car loan you used to pay.* You were already used to living without that money.** 

Once the loan is paid

Once you have paid off the loan, set up a separate account through a bank, credit union or other valid financial institution. (Ideally, it should be a high interest savings account.) Have the same amount that you were paying on the car automatically deposited into your (new, separate) account every month. Set it and let it grow. Keep doing this. Do NOT purchase another car until you have enough saved to pay cash for the next vehicle. If you desire a nicer vehicle the next time around, increase the amount that is automatically deducted whenever you get a raise. If you are paid twice per month, divide the car payment in two and save that amount every paycheck. 

Every time that feeling of wanting to buy a new car creeps in, check the balance on your “next car savings account.” Look at what you could purchase paying cash using that amount. If it’s not enough to be able to pay cash for a car you want, keep driving the old car until it is. 

It’s a great feeling to pay cash for your next car – and be freed from the burden of car debt.

*This tactic assumes you are living within your means and not paying high-interest credit card debt. If you are, then you should likely be putting your resources toward getting rid of that debt first.

**You can use this tactic to save for other goals such as a child’s college education. If you are used to paying for childcare, once your child enters school, you can direct some or all of the amount you were paying for daycare or a sitter to the child’s 529 college savings plan.

Engage with us! In the comments, share your best tips for minimizing or eliminating car debt and/or how to get the best deal when buying a car.