The Easy Way to Get Out of Paying Car Loans For LIFE
The difference between having $10,000 in 5 years paying for every new car and in debt $20,000+ in auto loans.
We ALL Make This Mistake At 18…
When I was 18, I bought a new car and I felt on top of the freaking world! I’d started working my first full-time job 1 week after my 18th birthday, 2 months after that I got my first $500 credit card, and then 4 months after that, I came home with a shiny new cherry red 2013 Dodge Dart!!
I was unstoppable! On cloud 9! I was an 18 year old with hardly any credit history and suddenly a $24,000 loan that I didn’t need a cosigner on!
Do you remember this if you went through it? If you didn’t, how many of your friends suddenly drove up one day with a brand new car, so super proud of themselves??
Did the thought ever go through your mind, asking yourself how much it costs? Yes?
What about asking if they got a loan for it? For me, if I did, but I didn’t understand the true cost of that car loan.
Where It Went Wrong
When I was first going around to the car dealerships, I was looking at used vehicles. I had no idea what I was doing though. I didn’t know about loans.
Yes, I was working at a bank, but I was a teller and between my colleagues and my parents growing up… we never really talked about loans.
As kids, or even teens, we’re taught that we have to pay loans back but… how many people do you know, including yourself, that had been taught about how loans actually worked and how to go about getting one?
Were you or those you knew taught about what bad debt was?
The problem? Our society doesn’t teach us, so we inherently don’t know how to teach it. It wasn’t the salesman’s fault, or my mom’s or mine.
You don’t know what you don’t know so… how can you ask questions?
How Much Did I Lose Out On??
It was a sad cycle… After the Dart, I traded it in, BEFORE it was paid off, for a Dodge Journey. That I can’t remember the price of, BUT I remember that I had never-ending payments to take care of!
The First Car…
There was this purple little hatchback that was, if my memory serves me correctly, only ~$4,000. It was so cute and I was so excited!!
The salesman walked over to me in the lot and we made some small talk and I asked about the car since the sticker was very confusing. I didn’t know if the figure on the sticker was the actual price and don’t even get me started on negotiating!
I didn’t even know negotiating the price of a vehicle was a thing…
But… because the salesman didn’t mention anything about financing, I thought I had to pay it in cash and… I didn’t have the cash.
I felt helpless. I thought I couldn’t get a car because the cheapest car on this one lot was out of my price range.
If I had even had one lesson or conversation on this, though, I might have saved myself thousands of dollars over the next 8 years…
What would my life look like if I had been told that I could get a co-signer and gotten that $4,000 car? That I maybe could’ve saved thousands upon thousands of dollars towards a house or a vacation or something else my teenage/young 20-year-old self could’ve wanted??
How Much It Really Costs
That new car? Roughly $24K. So, $24,000 at 3% (which is what I got lucky with), ended up being roughly $198 bi-weekly ($429 monthly) for 5 years.
The amount of interest would have been $1,858.80 over 5 yrs. The new price for the car is $25,858.80.
If I had bought the $4,000 car at, you know, we’ll double the interest rate and only go for 1 year, the payment would’ve been only been $158.69 bi-weekly.
For the used car, I would have paid a total of $125.81 in interest… that’s it!
“But Trinity, the car wouldn’t have lasted very long and you would’ve needed to replace it soon anyway! It’s better to get the new car with warranty!!”
- so many people I’ve spoken to who haven’t looked at the numbers
Let’s say the car would have lasted 2 years. Not including regular oil changes, it would have costed me $4,125.81 (let’s add $2,000 for repairs), so $6,125.81.
That’s $255.25 per month!
Better yet, let me get my handy-dandy notebook and do the math…
How The Difference Adds Up…
18-year-old me decided that $430/month was doable. So if I had, instead, bought the inexpensive purple car I would’ve saved on average $175/month.
That added up in a 5% investment, let’s say a TFSA, over the next 2 years could’ve bought me another little purple car when this one kicked the bucket.
I could’ve bought two cars…
What would’ve happened if I’d just kept going like that for the last 11 years?
Okay, just for curiosity sake, let’s say I originally invested the money in my TFSA at 5% thinking that I wasn’t going to take it out in a long time (hence why it’s in the market instead of a savings account — more on that later).
Disclosure at the end of the document…
Remember the new car price? $25,858? That’s how much you would have paid after 5 years of that car. Whereas, after 5 years and on your 3rd vehicle, you’re sitting somewhere around $10,000 IN YOUR BANK ACCOUNT, instead of paying it to the bank in interest.
Up $10,000 or… in the hole $25,858…?
Let’s talk about it!
Keep in mind that these amounts are ONLY using your car payment budget! This isn’t even taking into consideration the ~10% of your income that should be going towards your retirement and other savings (emergency & home purchase).
This is EXTRA money!
End Of Year 2 — Time To Buy A New Car!
In the picture up top, you see that the interest for years 1 and 2 is 5% whereas the interest for all other years going forward is 4%.
Why the change?
Well, thinking of when I was 18, I wasn’t smart enough to think 2 years ahead to think that I’d be using this money to buy my next car.
I know that I wouldn’t have thought I’d have enough money in there.
Originally, I probably would’ve thought that this investment would be for retirement or a home purchase in like, 5 or 10 years.
When I was setting the money aside for a longer amount of time, it makes more sense that I could handle more risk with my money.
Alright, these numbers won’t be exact, BUT for the first two years, we’re assuming that my average monthly cost for the car, including repairs is $255, which means $175 is how much I have to invest.
At the end of the 2nd year, I’d need to buy a new car, and I’m budgeting $4,000 again. That leaves me with $407 to start off again!
Years 3 & 4 — Starting to Look Like A Money-Making Investment!
After I saw that I could just endlessly buy a new vehicle without loans, it would’ve made sense to put this money into a savings account that paid high interest and was tax-free.
Monthly investment: $347
Beginning amount: $407
EOY 4 investment amount: $9,189
EOY 4 after new vehicle purchase: $3,189
With who I all work with now, I have a company in my toolbox who’s savings pays 4.45% as of the time I’m writing this and I could possibly put this High Interest Savings Account into a TFSA. Current rates here.
So, let’s be conservative and say that I’ll get 4%.
If we’re budgeting for $2,000 in repairs over the next two years, that’s $83/month for repairs and $347 for investing!
At the end, I’d have, what? $9,189 available to buy a new vehicle!
But… self-control! We’re doing only $6,000. That leaves me with $3,189 to start year 5!
Years 5 & 6 — The Boulder Is Rolling Faster!
This is where you’re really going to see the momentum building and where you’ll see the investment grow!
Monthly investment: $347
Beginning amount: $3,189
EOY 6 investment amount: $12,263
At this point, technically, you could be buying a more expensive car. It’d certainly be tempting!
We’re using me as the example, right? 24-year-old me was very much an impulse shopper, as much as I wish that I wasn’t!
Heck, I’m STILL an impulse shopper and I’m almost 30…
There’s nothing wrong with a $6,000 vehicle though. Right now, I drive a $5,000 one and it’s great! Probably have another year or two in it!
EOY 6 after new vehicle purchase: $6,263
All of this to say;
Show your kids that are almost driving this article. Even just the chart that you saw up above. Show them that instead of spending $430+ per month and giving it to someone else, they could be making bank on it.
I WISH this was the path that I followed early on. Now? I’m starting at the beginning because it only clicked for me a couple of years ago. I could be at that $22,000+ mark by now. Where would you be at??
If you want to find out, use calculator.net! It’s free and I personally rely on it for MANY different purposes.
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