Aside from a house, a car is probably going to be the most expensive thing most of us ever buy. According to Experian’s 2017 “State of the Automotive Finance Market” report, the average auto loan amount is now $30,621.
Sound like a lot? That’s because it is – and our cars probably cost more than that. The $30,621 figure is the auto loan amount. Imagine how much it might be without trade-in allowances and/or down payments.
Oh, and we’re borrowing for a lot longer. Almost one-third of borrowers (32.1 percent) are choosing terms of 73 to 84 months.
These are the kinds of numbers that make me want to lie down with a cold cloth over my eyes. I learned them while researching “How to finally pay off your car this year,” an article for Magnify Money.
Fortunately, I also know of some consumers who didn’t opt for seven-year loans. Instead, they paid off their vehicles in six to 18 months. They weren’t well-heeled – just determined.
I’m sharing their tactics to get readers thinking outside the payment envelope. Even if you don’t have an auto loan, chances are you know someone who does. Bonus: This kind of dedication can apply to other short- and long-term financial goals, too, such as paying down consumer debt, building an emergency fund and saving for retirement.
‘A liberating feeling’
Deacon Hayes and his wife had $52,000 worth of debt (including student loans) in 2009. About one-third of that debt was in the form of an auto loan for their Nissan Altima, at 4 percent interest.
The car cost them the equivalent of $400 a month, including higher registration fees for a newer car. After about a year of payments, they realized they wanted to be debt-free more than they wanted to drive a new car.
“If we got rid of it, that would give us more money to tackle the rest of the debt,” says the 35-year-old Phoenix resident, founder of the Well Kept Wallet personal finance blog and author of “You Can Retire Early.”
Although the car was fairly new they were aware it wouldn’t fetch them $17,000 on the secondary market. The two of them trimmed the budget (cable, gym membership) and started hustling: he took a second part-time job delivering pizza, and they sold a few items (game system, some purses) that weren’t being used.
The buyer they found on Craigslist was willing to part with $16,000; their side hustles paid for the rest of the loan, and they transferred the title.
“It was a liberating feeling,” Hayes says.
Next, they sold his wife’s already-paid-for car for $5,000 and used that cash to buy two “older yet reliable” vehicles: one from a friend and the other from Craigslist. Not having a car loan – and paying less for registration and insurance – meant more cash flow each month.
“Definitely worth it,” he says.
‘So glad to be done’
Back in 2014, a young woman named Bailey was fresh out of college and living with relatives in a rural area with no public transit. She had a job, but no wheels; since she didn’t have much money saved and hadn’t yet built a credit score, Bailey wasn’t able to get an auto loan.
So she bit the bullet and did what a relative advised her to do: Took such cash as she had and went to a “buy here, pay here” auto dealer.
“It was a terrible decision,” she says now. At the time, it was the only decision she could make. Her kind of situation is what keeps predatory lenders in business.
Since she didn’t know how to look up a car’s real value, she wound up overpaying wildly for a 2001 Ford Focus. The vehicle’s Kelley Blue Book value was $1,500. Had Bailey paid through the length of the auto loan, she would have spent $10,484.
Those biweekly payments made her ragey, so she vowed to get out of them early. A second part-time job, for a total of 60 hours of work per week, meant extra money to throw at the loan. She paid board to a relative rather than get her own place.
Bailey created and stuck to a strict monthly budget; any dollars left over went to the loan. It was a very strict budget, especially for a young person.
“I didn’t go out to eat. I didn’t go to the movies,” says Bailey, 25, an Iowa administrative assistant who blogs at Becoming Bailey.
Here’s her advice to other young people: “Save as much as (you) can for a down payment. And avoid the buy-here-pay-here places completely. I am so glad to be done with that place forever.”
Oh, and check the Kelley Blue book before you buy. You can do it online.
‘Debt is such a burden’
After putting $7,000 down on a brand-new 2016 Mitsubishi Mirage, Kat Tretina could have easily made the $190 monthly payments. But she wanted that loan retired pronto.
“Debt is such a burden on my shoulders. It kept me up at night,” says Tretina, 32, a full-time writer for Student Loan Hero.
A few months in, she read an article about auto loan refinancing and called a credit union. Turned out she could get a 2.9 percent interest rate for four years instead of the original loan of 6 percent interest for five years. Then it was off to the early-payoff races.
Tretina did some freelance writing and “thrift-store flipping on eBay.” She and her husband took on some pet-sitting gigs. A bonus from her day job went toward the loan. “At the end, we were putting a little over a thousand a month toward it,” she says.
In five and a half months, the new loan was finished off. Total interest saved: $1,800. Now their side gigs are going toward rebuilding the emergency fund (shrunken by recent medical expenses) and retirement.
Some people suggested she not pay off the loan early but invest that money instead. “But to me, investments are never guaranteed. That risk, plus the burden on my shoulders – I would rather have had the debt paid off,” Tretina says.
Auto loan payoff and your future
Some of you might also think that at 2.9 percent, Tretina should have invested the monthly payments. But I tend to agree with Sonya Smith-Valentine, the financial educator (and former consumer lawyer) I interviewed for the Magnify Money article: Today is not forever. A lot can happen during the term of a loan.
“You can handle $400 a month today, but what happens if you lose your job or have to move?” Smith-Valentine pointed out.
While she was referring to those seven-year loans, I think the same applies to the four- or five-year ones as well. You can make the payments right now on that minivan you bought to transport yourselves and your baby-to-be – until, maybe, your wife is put on bed rest or gives birth to a medically fragile child, which means the loss of an income for an unknown amount of time.
Or perhaps your kids are out of the house and you can finally treat yourself to that sporty convertible or that luxury car. But as Smith-Valentine points out, if it’s not in your budget then you shouldn’t buy it.
“Instead of saying ‘I need to buy a car that I can finance with a three-year loan,’ they’re saying ‘I want that Mercedes. The only way I can have it is with a seven-year loan? Okay, I’ll finance a seven-year loan’.”
I will concede that some people should save for retirement, especially when they’re young. But if you can go all-out to pay off the car loan, the way these people did, then you’ll be freeing up money every month that can go toward your future. For example, Tretina saved $1,800 in interest in fewer than six months: That’s money she can now put into long-range financial planning, along with the monthly auto loan payments she would otherwise have been making over the next four years.
Readers: Did you ever pay a car off early? What kind of difference did it make to your budget?
This is a timely article. I just mailed in my last car payment this week, as I was tired of making payments for over 3 years. I just bit the bullet, & mailed in a lump sum. And, it’s a great feeling to be done with it, rather than making payments for 6 years. 🙂
Congratulations! That must be a great relief.
To anyone who’s considering this: Call your lender and ask for the “payoff amount,” and make sure there isn’t a prepayment penalty.
After a car wreck I found myself in need of a car without the benefit of having a large savings account. Thankfully, my credit union allowed their members to break down their payments over the month with the principle being paid first. I paid a small payment every week on payday and trimmed a year off the loan. By throwing in birthday money, refunds, etc. another 6-8 months was hacked off. So worth it!
Another reason to love credit unions! And good for you for retiring the loan early.
Excellent article. Way back in 2007 I paid cash for a new Kia Spectra with part of an inheritance from an Aunt. Having been recently widowed, I did not want to take on any debt – but I definitely needed a new car. I’ve kept that car in good condition with proper maintenance and since I don’t do as much driving as most people there’s only about 61,000 miles on it. Seriously. This car will last quite a while longer and I have never regretted not taking a loan on it. Just a side note – at the time, I looked for, but could not find any good advice/instruction books for women who have been recently widowed. There are many pitfalls out there for those who are vulnerable to bad advice at a time of loss. Thanks for your inspiring blog and all the work you put into it. I always look forward to it.
Thanks for your kind words. And…Maybe you should write that book? I know that some have been written since 2007, but CreateSpace makes it pretty easy to publish a book if you decide not to go the traditional route. You could write about the dangers to be dodged just when you’re about as vulnerable as you’ll ever be.
I hope you have found peace and healing.
As of today, with my payment for January going through, I am 2/3 of the way through my car loan (of 60 months).
If I needed to, I could cash in some investments to pay off the loan – so if my situation changed (loss of job etc) I could get rid of the loan right away.
But at 0 percent interest, having the money in investments makes more sense to me right now.
Another good example.
I was going to ask you what you thought of 0% loans, Donna. Are they a good deal, or is it more BS from lenders?
I’m not a loan savant, but off the top of my head I’d say it depends on the circumstances. Elsewhere in the comments section, Tina Schmidt reveals how this worked for her.
Doing your research before heading to the dealer means you’ll have the facts on your side. If you know what that whatevermobile should cost and resist add-ons that you don’t want/need and the price is reasonable (especially compared to other dealers you’ve shopped), by all means take the zero-percent loan. But if you see evidence that the Dealer A is trying to make it up in other ways (say, giving you much less of a trade-in than Dealer B was willing to offer), or you get pressured to add a warranty or undercoating or fabric sealants or any other dealer add-ons, remember that you can walk away.
Some useful general info at:
https://www.consumerreports.org/car-financing/costly-misconceptions-about-car-loans/
https://www.consumerreports.org/cro/news/2015/04/survival-guide-to-buying-a-new-car/index.htm
I bought my current car, a Mazda3, in 2011, just before my son started college. I got a 0%, 5-yearloan and kept the payments at $200/month. It has less than 80,000 miles on it and it’s a great Mom car. Car companies offer low financing rates to move some of the less sexy cars. Not everyone qualifies for the super-low rates, but if you do, and you don’t mind the Mom car, it’s a good deal. It enabled me to get a new car with college bills looming. (The old car was starting to need more and more work.)
Sounds like a great fit overall.
This article doesn’t address how to handle 0% interest car loans. If you have that type of deal, you may actually be better off making your payments as scheduled for the life of the 0% loan and investing the money you save on interest or would pay up front with an extra payment amount, over the course of the loan.
Not everyone can get a zero-percent interest loan. Even if I were able to get one, I’d still be interested in retiring the loan early.
Your mileage may vary, as it were, but some people would rather have no loan, even at zero percent. Life changes and being debt-free can make it easier to change back at it.
Tretina saved $1,800 in interest by refinancing and paying the loan off early. That’s $1,800 she can put toward retirement, along with money freed up each month thanks to the lack of a car payment. As the CFP noted, monthly cash flow is what will build your wealth over time.
Thanks for reading, and for leaving a comment.
Donna, I was forced to cash out an insurance policy in the middle of my divorce. I put the cash toward paying off the car loan at the credit union.
then I pretended to still have the loan but shifted the money to buying shares. It really charged my savings plan. Plus, I really did pretend to relatives that I still had the loan, so no one asked for money. Five years on I waltzed in to the credit union and borrowed money to upgrade our computers since one daughter was starting university and the other was running her own business and needed a new computer. The new loan was nowhere near the maximum I could borrow. I just shifted the car loan payment back to the new loan, my life never changed, I saved a lot of money, and bought new laptops without feeling the pinch.
Smart! And the bonus is the continued health of your credit score (“hey, this person borrows money AND pays it back!”) as well as the paid-off car or the upgraded computers.
Thanks for reading, and for leaving a comment.
In 2005, I bought a used 2005 Ford Taurus with 20,000 miles on it. Not only did I pay about half the price of a brand-new Taurus, but I paid off my 5-year auto loan in about 2.5 years by living way below my means, getting it off my credit report around the time we started seriously house hunting and preparing to take on a mortgage, which was nice. The best part? I’ve been driving that car for nearly 13 years now, which has given me ample time to save up so my next car can be bought in cash. I have no plans to trade it in anytime soon, though – I love my car (it’s the first and only car I’ve ever owned, so I’m a little attached to it)!
That’s how DF was able to pay cash for the “new” (to us) Subaru: By driving the old Subaru until it was no longer cost-effective to fix the thing (14+ years). He donated the old car to charity and we hope to drive the current one for another dozen years or more.
I had a great attachment to my own two cars that I bought in my lifetime. Hated to trade the first one in to get the second one, and then felt a little sad when I gave the second one (it was eight years old by then) to my daughter and her husband when they moved to Phoenix. That was when I lived in Seattle and had a ton of public transit options.
Favorite memory of the first one? Abby drove herself to senior prom in it, with a cardboard sign in the window: “Compact Limo.” That was in reference to the friends who were renting limousines to go to the prom. At that point she was saving every dime for college and just didn’t see the point of leasing some wheels.
Wow! The folks you wrote about made great efforts, and achieved inspiring success. If I were to add anything, it would be not to underestimate the power of even a small effort, applied consistently over time.
Not a car loan, exactly, but a few years ago MrH and I took out a 3-year title loan on one of our cars to pay an unexpectedly high tax bill. The monthly payment was $116, but we consistently made payments of $120. Near the end of the loan, we were on track to pay it off a month early, and the final payment amount was shrinking fast–but a surprise windfall let us retire the loan even earlier.
We’ve applied the same principle to our mobile home loan, my student debt, and a variety of other loans throughout the years. It’s successful for us because the extra amount is small enough not to pinch too badly, yet it makes a huge difference over time, especially near the beginning of the loan if overpayments are credited directly to the principal. IME, they usually are.
Agreed! Especially with regard to an emergency fund: Some people think they could never save enough so they don’t try. I say even $5 a month is a good start, and then keep looking for ways to improve that amount.
I have to admit, we’ve struggled to apply this to savings. MrH gets nervous if the checking account balance drops below a certain level–but if the money’s in the checking account, it’s liable to get spent. Especially now that the tightwad (that would be me) isn’t doing the majority of the grocery shopping.
But progress is being made!
Between December and January, our cars racked up a total of about $1400 in repairs. That pretty much ate the Christmas money, the EF, the cash stash, and a contribution from our son (fair, since it’s his mode of transportation!) and we still had to put a couple hundred on the credit card. But. But! We were able to cover the repairs. This month we replenished the stash, and next month we’ll start slipping money into the EF* again. And I think it finally clicked for MrH why I’m so insistent on salting money away, even if it means being stingy at the end of the month. It’s a process–but we’re just a little closer to being on the same page.
*Technically, the cash stash is part of the EF. But for whatever reason, we usually think of them as separate entities. Whatever works, eh? 😉
Progress is progress and should be celebrated as such.
A reminder to you and other readers: Anyone who wants a free PDF of the “Challenge Yourself to Save” chapter from my first book can request it at SurvivingAndThriving (at) live (dot) com. It contains 33 examples of “stealth savings,” i.e., frugal hacks that are easy to do without disrupting your life. Some of them are even fun!
If you want it, you got it. E-mail me.
I was hoping that my paid for 2005 Corolla with 155,000 miles would last me for another 5 years. Alas, I was rear-ended on a freeway off ramp and the car was deemed “totalled”. I was expecting to receive @ $4,000 from my insurance company but was pleasantly surprised to get close to $8,000. We searched Craigslist etc. for good used car and ended up with a 2005 Honda CRV (I like being higher off the ground) with 122,000 miles for $4500. After registration and a couple of hiccups (broken windshield and replacing an oxygen sensor and oil change), it ended up costing @ $5,000. So my car replacement fund got a $3,000 boost! Better yet, I LOVE this car.
Things worked out about as well as they could have, given that you hoped your car would last.
The same thing happened to my daughter and her husband: They were driving a paid-for car* they hoped would survive another four or five (or more) years when a careless driver hit them. Their insurance company wasn’t as generous: She had to fight tooth and nail, especially since the bean-counter was using an old map that indicated Abby was at fault. Abby made her look at a revised map and also had to insist on a higher settlement fee (the car had frame damage), which meant researching what similar cars were going for in their area.
*That was my vehicle originally. But when they announced plans to move to Phoenix, I realized that the only reason I had the car, really, was so that they could get to medical appointments. I was fine using public transit. So I sold it to them for $1.
Hmmm, my very first car loan was for 36 months, with payments of $75.08 a month. I paid it off 14 months early. It was a used car and I was a student working up to three jobs. I was so proud of my early payoff!
About five years ago, my credit union was offering a screaming deal on used car loans (about 1.5%). I did a title loan, just to improve my credit score, since I had very little debt in my credit history. The plan was to pay it off as scheduled. Didn’t work. I couldn’t stand making payments, even if they were automatic. I killed the loan after about ten months and got my pink slip back.
I used the car for business and was paid mileage, so at least my little experiment didn’t cost much OOP. I never did check to see if my score changed. Meh, I don’t care now, I’ve retired and I’m not planning on borrowing money. I paid cash for my last (new to me) used car, which I plan to drive for many years.
I am grateful beyond words to be in this position.