As a loan officer I see all too often a client that is a solid candidate to buy a home, except for one thing, a large car payment. With cars becoming more complex due to on-board computers and sophisticated electronics on most new vehicles, car buyers need to find creative ways to pay for those new cars. And car buyers paying for these higher priced vehicles with more creative loan terms that are having a detrimental effect on their long-term financial profile. What if there was a better way to buy a car so you don’t have to jeopardize your financial future with a large car payment? Let me show you how to do that with my long-term car buying strategy.
The Average Car Payment Continues to Increase Every Year
According to Experian Automotive, the average new vehicle loan amount was $35,392 in Q1 2021 and the average monthly payment rose to $577. The average new car loan term also rose to 69.50 months which is just short of a six year loan term. If we step back and take a look at those numbers, we also need to factor in that CarFax research shows that most new cars lose 20% of their value in the first year of ownership, and 60% of their value after five years of ownership. So, CarFax notes that a 5 year old vehicle that sold for $40,000 new will be worth $16,000 after 5 years. And a 5 year old vehicle that sold for $30,000 new will be worth $12,000 after 5 years.
To put this in to context, in the scenarios above, after 5 years of making payments on your vehicle, that shiny new car that you fell in love with years earlier will still be a high payment burden five years later with up to 12 more months left to pay on the car loan. And when you finally get the car paid off it will most likely be time to upgrade to the next car and then the cycle starts all over again. But, there is a better way and let me show you how.
How to Buy a Car and Remain Free from Car Payments Forever
Lets assume you had bought a car in the past and you finally paid it off. Rather than getting rid of it right now, hold on to it a little longer and continue to put that $577 monthly car payment in the bank. In two years of saving you will have just over $13,000 saved and if your car is now worth $10,000 then you have a tidy $23,000 between trade in and funds in the bank for a solid used car.
This is how I have bought my cars for years and I never have had a car payment. Instead of buying new cars, I buy 2 – 3 year old used cars and keep them as long as possible. I always buy cars from a reliable car brand and there are many to choose from, that way my repair bills are minimal along the way. Yes, I don’t ever get that new car smell, but I like my car payment free bank account each month instead of that new car smell which doesn’t last any way.
Once I get in to another solid used car, what I normally do is set a goal to put $3,000 per year in a high-yield savings or money market account which is only $250 per month, or one solid tax refund or quarterly or annual work bonus to save. After five years I have $15,000 saved up for a car and I am ready to replace the car I have with another solid used car.
I keep repeating this process over and over again and like I said, I have never had a car payment because I plan ahead, save money, and I buy good certified pre-owned dealer cars rather than new. If this is a plan that you feel you can follow, it works and it will keep you from being held down by the ridiculously high car payments that people are signing up for these days.
How does Buying a Car affect my goal to Buy a Home
That’s a question that I get every week as a loan officer when talking to clients and my answer goes like this, “buying a car and taking on a high monthly payment will affect your debt-to-income ratio calculated by the mortgage lender”. You should set a goal to keep your debt-to-income ratio under 43% when purchasing a home and your debt-to-income ratio is calculated by adding up all of your monthly debt payments divided by your gross monthly income.
Most clients with incomes close to what are considered to be average annual incomes in the $50,000 – $60,000 range need to manage their monthly payments so that the debt-to-income ratio doesn’t start creeping up. Most of us in the US need a car to get to work and to get around town, but there is a smart way to buy a car and a not so smart way when it comes to managing your debt.
Follow my plan to the letter and you will never have a car payment to speak of. This car buying plan works and my car payment free life proves it. Give it a shot and you will see this car buying financial plan will work as well for you as it has for me.
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