Tag: Car loans

Minimize Your Vehicle Debt

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.

Pay cash for your cars

Buying a new vehicle is not a decision to be undertaken lightly since the financial ramifications can put a serious crimp in your cash flow for a very long time if you’re not careful.

Check out this article on how Canadians are taking out lengthy car loans to minimize the monthly payment. Think about it for a minute. Canadians want expensive vehicles and they’re willing to finance them, but the required minimum monthly payment over a 5-year period is simply too much for their budgets to bear so they agree to repay the loan over 7, 8 or even 9 years! These kind of lengthy repayment periods are lunacy! Like eating too much of your favourite dessert, long-term loans promise delight in the short-term and guarantee regret over the long-term.

Vehicles are expensive! A brand-new pickup truck in my corner of world can run $70,000 or more. Brand new SUVs start around $25,000. Luxury sedans start at the $39,000 mark. Even on the second hand market, a nice vehicle with fewer than 100,000kms will run you atleast $10,000. I’ve seen financing offers last as long as 96 months for new vehicles – 96 months is 8 years! It should never take anyone 8 years to pay off a car loan. Depending on the driver, a vehicle may need to be replaced at the end of the 8 years and the whole cycle of paying a car loan has to start again. Or, even worse, a vehicle may have to be replaced before the loan period expires and the old loan value has to be rolled into the loan on the next vehicle.

I’m here to tell you that there is a way to live without car payments, to go years without ever having a car payment while driving cars that you can afford. This fool-proof alternative path to vehicle ownership completely eliminates the need for financing. It’s called paying cash for your vehicle by saving the money before you buy. It’s not a particularly popular method, and the car dealerships will never advocate for this method. You can rest assured that the Ad Man and his trusty sidekick, the Creditor would have fits if great swaths of the population decided to follow this method for purchasing motorized transportation. Yet, I guarantee that this method will work for you every single time. If you save up to pay cash, you will benefit twice by acquiring a vehicle without acquiring any payments!

Nearly twenty years ago, a woman from a book club to which I belonged gave me advice about how to buy a car. It was exceptionally good advice, which is why I still remember it. She said that her grandfather had taught her how to pay cash for all of her vehicles. I was most intrigued!

Essentially, the advice was to save the equivalent of a car payment in a separate account until the next desired vehicle could be purchased with cash. At the time, Book Club Lady was setting aside $350 each month in a bank account dedicated to buying her next car and she planned to do so for five years until she had enough to buy her next vehicle in cash. Bingo-bango! At $350 per month, she’d have $21,000 in place to buy her next vehicle in 5 years. And after she purchased her vehicle, she would continue to set aside the amount of money (or more if she wanted) in the bank so that she would be in a position to pay cash for the next vehicle. Technically, one could argue that she was still making a vehicle payment but so what? The fact was that Book Club Lady was making a payment to herself and she wasn’t paying any interest on a car debt.

How many of us prefer to finance a car and pay interest to a creditor? Don’t be shy! Raise your hand. Yes, you’re in good company. Car companies make oodles of money through their financing divisions. Why? Somehow, we as a populace have decided that cars are to be replaced and upgraded regardless of whether they are still roadworthy. Replacing one financed vehicle with another one is far more important to us, collectively, than preserving our money for a period of time and buying something outright with cold, hard cash.

I speak from experience. I’ve twice bought brand-new vehicles. The first one was held for 7 years, and I took the full five years to pay it off at a rate of $325 per month. The second one still sits in my garage, 10 years old this year. I was smarter the second time around as it only took me 6 months to pay off the loan. Despite the wise advice of the Book Club Lady’s grandfather, I financed both of my cars and didn’t give a single thought to setting aside my former car payment so that I could buy the next car in cash.

Let’s face it – vehicles cost money to buy. We can either pay a lender to finance the vehicle, or we can put ourselves in the shoes of the lender and simply pay the same amount to ourselves. Either way, we’re still getting a vehicle out of the deal.

My 10-year old SUV is not going to run forever, so I’ve finally started a dedicated vehicle-replacement fund. Every two weeks, $250 from my paycheque is set aside for the purpose of buying my next vehicle. I’ve committed to driving my SUV until the wheels fall off, so hopefully they stay firmly in place for atleast the next 5 years. If my SUV fails me before my chosen time, the money in my vehicle replacement fund will serve as a good down payment on the next vehicle or it might be enough to buy me something that I don’t completely and absolutely love but can live with until I have enough cash to get what I really want.

“So how do you get the first vehicle without financing it?”

Good question. The first option is to figure out how to live without a car – ride a bike, take public transit, walk, Uber. Some of these options might work some of the time, but they’re not all free. I harbor no illusions that everyone can live without a car. If you’re a person who needs a vehicle to live the life you want, then you might be stuck with financing the first car. But that doesn’t mean that you finance the best car available! It means that you finance the cheapest car you can find that meets your basic needs. You keep that car payment as low as possible so that you can shovel money into the vehicle replacement fund.

Let’s say you finance a $5,000 over 3 years at 2.99%. Your car payment budget is $350 per month but your required car payment over three years is only $85. You’re not thrilled with the vehicle but it safely takes you from A to B, which is really all a vehicle is supposed to do for you. While you’re paying $85 on your car loan every month, the other $265 (= $350 – $85) is going into your vehicle replacement fund.

At the end of three years, you have $9,540 (= $265 x 12months x 3 years) in the bank to go towards a new car. You can either buy a new vehicle for $9,540 or you can keep driving the first $5,000 car while socking away the full $350 into your car replacement fund. Since the car loan ended after three years, that $85 dollar payment can now be paid to yourself instead of to the lender. If you save $350 per month for two more years, you’ll have $8,400 which can be added to the $9,540 already in place, giving you a total of $17,940 in the bank to buy your next vehicle in cash.

Alternatively, you decide to pay off the 3-year car loan as quickly as possible. At $350 per month, your $5,000 car loan is gone in 14 months. At that point, you continue to pay that $350 to yourself while you get accustomed to a life without debt. At the five year mark, which would be 46 months later, you’d have $16,100 (= $350 x 46 months) in the bank waiting to go towards your next vehicle.

To my way of thinking, you should keep driving the $5000 vehicle until the wheels fall off! In the meantime, you continue to squirrel that $350 away every single month until you need to buy another vehicle. However, some of you will want to get rid of the $5000 car as soon as you can. Who am I to stop you? You’re an adult so buy whatever you want. Just make sure that you pay cash!