It is ridiculously easy to incur as much vehicle debt as much as possible – aka: more than absolutely necessary – when buying a new set of wheels. You simply have to do the following three things:
- borrow as much as you possibly can,
- get a really high interest rate; and
- pay the absolute lowest minimum monthly payment.
Taking all of these steps will ensure that you acquire and maintain the maximum amount of vehicle debt for as long as possible.
… Wait – what?!?!?
On the off-chance that you’d like to keep more of your money for yourself, this article will teach you how to manipulate a few financial levers. By following some or all of these tips, you’ll get a new vehicle. The side benefit is that more of your hard-earned money will stay in your own damn pocket.
Ideally, you’ll pay cash for your next vehicle. The sad truth is that we don’t live in an ideal world. Gentle Readers, I know that most of you will take a loan and spend several years paying off your vehicle debt.
Should you wish to avoid paying the maximum on your debt, then heed the following words. There are several levers at your disposal to keep your vehicle debt as low as possible.
Lever 1 – Buy a less expensive vehicle
First, you don’t need the most expensive vehicle that your budget will allow. It’s perfectly okay to drive something that costs a wee bit less than what the car dealer wants you to finance. Be completely honest about what you need, not what you want. All you really need is a vehicle that will safely get you from A to B.
Your worth as a human being is not determined by the car you drive. Transportation should never have any impact on your self-esteem. People who care about how your car looks aren’t the ones who are paying for it. If they want you in a $95,000 SUV, then let them foot the bill. Your goal should be to drive what’s best for your budget because you know that your value as a human being is not dependent on the kind of vehicle that gets you from one destination to the next.
It never ceases to amaze me how many people never consider the option of spending less money in the first place!
Lever 2 – Get the lowest possible interest rate
I cannot stress this enough. There are 2 portions to each of your loan payments – the interest and the repayment of principle. The interest rate is the price you have to pay to the lender for borrowing their money. If you have a low interest rate, then more of your payment will go to repaying the principle instead of lining the finance company’s pockets. The opposite is true. A high interest rate means that more of your payment goes towards paying interest.
The interest rate applied to your vehicle loan will fluctuate with your credit score. A higher credit score results in a lower interest rate. Conversely, a low credit score results in a higher interest rate.
Lever 3 – Increase your monthly payment
Increase your monthly obligation results in the loan being paid off more quickly.
For example, let’s stay that you can get a 5-year loan for $150 per month. If your budget will allow for a $350 payment, then make the higher payments for a shorter period of time and pay off your debt years earlier. Hear me well as I say the following to you…
Making the minimum payment never benefits the borrower!
Paying the lowest minimum amount always results in the maximum amount of interest being sent to your lender. Paying a higher amount than absolutely necessary is a form of short term pain for long term gain.
Lever 4 – Make a big down payment
Your down payment on your next vehicle should be as large as you comfortably afford. The larger your down payment, the smaller the monthly payments required to completely eliminate the loan.
You’re going to have to pay for the vehicle anyway so minimize the pain by paying for it as fast as you can. Hopefully, you’ll be able to sell your previous car privately and get more money than by selling it to the dealer. There’s always the chance that you’d been saving up for your next car in anticipation of being able to pay cash, but something went awry and you had to buy sooner than you’d anticipated. If that’s the case, then good on you! Use the money from your vehicle savings fund as your down payment.
Lever 5 – Make loan payments to yourself
Once your loan is paid off, continue to save the payments in a separate account. Your current car will not last forever. And no – paying off one loan is not an automatic trigger to buy your next vehicle. Drive your vehicles until the wheels fall off!
Trust me on this – your car purchases will always incur far less hassle, angst and financial worry if you already have money in place when it’s time to buy the next vehicle. By continuing to save your car payments, you’ll give yourself two options: you’ll either have the cash on hand to simply pay for it all at once or you’ll have a sizeable down payment to ensure small monthly car payments.