We are in the market for a new-to-us car. Notice I did not say a new car. More on that in a minute. My current vehicle has over 215,000 miles and sufficient character quirks to have earned a moniker. Yes, a car with a name. Usually only well-used or supremely ugly vehicles acquire nicknames. You know the type. The sales listing for the car in question will include phrases such as “great student car”.
Our trusty car has served us well for the last seven years through the addition of two kids and the adventures that car seats bring, but we are ready for something a little newer and roomier.
Bring on the car shopping!
My husband and I agreed several years ago to stop financing vehicle purchases, but that hasn’t always been our approach. The truck I had in high school and college was financed, as was the truck I purchased fresh out of college. I hadn’t even started my first post-college “real job” when I signed the loan papers for the new-to-me wheels. I didn’t even pause to consider saving up the money first and then shopping for a vehicle. [One of the many times I needed a financial guardian angel to tap me on the shoulder.] None of my family or friends suggested that route either, at least not that I recall, and I doubt I would have listened if they had. Both were used vehicles but I had no business buying either one. I had virtually no savings and was only thinking in terms of the monthly payment.
Shortly after entering the post-college workforce (and about a year before we met), my future husband financed the purchase of a BRAND NEW crew cab pickup with all the options known to mankind, amortized for seven years. 84 months. Oh my. That was a spirited pre-marriage counseling discussion.
We have worked hard to improve our financial decision making since those days and one of the key mindset changes we adopted is to pay cash for toys (vehicles, ATVs, campers, trailers). There are huge financial advantages to adopting this philosophy. Making this one change in your financial behavior is a game-changer in terms of your ability to increase your savings and build wealth.
Today I am sharing three reasons why you should pay cash for your next vehicle.
The payment-of-the-month club sucks
Having been a member of this miserable club, I can attest to a few of the not-so-great membership benefits.
(1) Negative Equity is Likely
The average monthly new car loan payment is $482 according to a recent Experian Automotive report. That’s nearly $500 a month for five or six YEARS. Vehicles go down in value with every mile driven. Financing the purchase of an asset that declines in value over time is asking for trouble. It is way too easy to end up a year or two into the loan and find yourself with a vehicle worth $15,000 and an outstanding loan balance of $20,000.
(2) Fixed monthly expense for YEARS regardless of life changes
Those car payments stick with you, no matter what happens in your life. That $400 monthly payment didn’t sound too bad when you were making $5,000 a month, but it is a lot less fun when your overtime hours have vanished and your landlord raises the rent.
Which brings me to reason #2…
When you pay cash, the vehicle is yours free and clear – no matter what your future holds.
Peace of mind.
Being the boss of your life.
It feels different to drive a vehicle that you own outright. It belongs to YOU, no matter what happens around the next corner. It is a beautiful thing.
Delaying gratification makes the reward really sweet…and less impulsive. Taking the time to save up the money before you make the purchase goes a long way in preventing impulse vehicle purchases.
The first cash vehicle purchase you make is the hardest one. It can seem like it will take forever to build up enough savings to buy your next car, but it can be done. We have done it twice so far and will never go back to financing.
(3) You will do a better job evaluating options before purchasing
Spending your own money on a purchase is harder than signing a bank note. The purchase feels different. Paying cash for vehicles forces you to really think about what you are buying, consider your options and prioritize your vehicle needs above wants.
Paying cash also switches your mindset from thinking about the monthly payment to considering the actual purchase price of the vehicle. Vehicle purchases are significant purchases for most households in terms of the purchase price as a percentage of annual income, but we don’t always give this enough thought. How much car can you reasonably afford?
If you have $6,000 saved up for a vehicle and need a vehicle right away, buy a $6,000 car instead of making a down payment on a $40,000 one. You don’t have to drive it forever (unless you are cheap like me), just long enough to save up the funds to upgrade. And then keep setting aside funds and upgrading over time until you own that $40,000 one free and clear the day you purchase it.
If you go in with a cash budget, it is much easier to stick to your plan and avoid the upsell on the lot. You have a fixed amount of money available for the purchase. Period. Raise your hand if you’ve left a dealership with twice the car you intended to simply because the payment was “only X” and that was pretty close to the monthly payment you were planning on for the lesser vehicle. It happens all the time to people with the best of intentions. Say hello to buyer’s remorse.
One common upsell is being convinced to buy a new vehicle rather than the used vehicle that you found initially. Unless you have the cash and the net worth to justify it, just say NO to brand new cars. The first drive off the lot and into your driveway is a pricey one in terms of vehicle depreciation and you likely have much better uses for your hard-earned cash.
Okay, stepping down from my soap box now. Happy vehicle shopping!
Are you a cash car buyer or a card-carrying member of the payment-of-the-month club?
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