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Why Your Car Payment is Destroying Your Financial Future

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The average car payment is over $500, and many happily pay it. Here are ways to lower your car payment and drive your wealth in the right direction.

How much is your car payment each month? How much of your monthly income, on a percentage basis, goes towards your car payment? Experian reports that the average monthly car payment breached the $500 mark for the first time in 2016.

Just let that sink in for a moment. In an age where we face financial headwinds like bloated student loans and out of whack health insurance, the average car payment is over $500. I think the underlying problem goes back to a number of things, chief among them our lust for status and comfort.

Unfortunately, last I checked, car payments don’t keep us warm at night. They don’t put food on the table. They most certainly won’t take care of us in our golden years when we want to enjoy life. However, we continue to gobble up car payments like a kid at a candy store.

Thankfully, there are ways around such a massive car payment, but it requires a shift in thinking.

Why A Massive Car Payment is Foolish

 

Let me step back for a moment. I don’t want to sound like I hate cars. I don’t. I love a good sports car like the next guy. My first car was a fire engine red Pontiac Firebird (that I bought with cash), and treated like it was a baby. I washed it. I waxed it. I kept it in covered parking. I loved it. But, when push came to shove I had to get rid of the car.

Back to the point…I love cars, but I hate car payments. Why is that? It’s because they do nothing to provide long-term wealth. They do nothing to increase your net worth. They do nothing to provide you shelter. In short, cars are depreciating assets, and when paired with a massive car payment, they erode your wealth.

Case in point is the negative wealth we face in our society. Negative wealth means your debt is worth more than your overall assets like a house, investments and so forth. True, with a house you may have a mortgage, but you can argue that a house will probably rise in value and thus can reap those gains upon moving.

A car, on the other hand, provides none of those benefits. Regarding negative wealth, reports indicate that those in America with negative wealth have 40-55% of their total assets residing in one thing – their car and that’s just plain stupid.

Just think of what you could do with an extra $500 per month. Here’s a short list off the top of my head:

  • Max out your retirement account
  • Save money for a down payment on a new house
  • Save for your children’s college fund
  • Pay off debt

There are many other things you can do with $500 – heck, that kind of money is life-changing money when managed right. This really is the key, using money as a tool to benefit your future self and not throwing it away on something that adds no value to your bottom line.

Take it a step further, though – what if you’re in the “everyone has a car payment, so it’s ok if I have one” camp? What if you always have a car payment in the $500 range? Over 20 years that’s $120,000 – and that’s not even accounting for how you could grow that money through investing.

The Hidden Risk of Large Car Payments

 

So we know that large car payments can destroy our financial future, but what does it mean in the present? How can they impact our day-to-day living? For starters, large car payments put you at risk if you’re unable to make your payments.

In fact, Experian reports that growing numbers of individuals are at least 60 days late on their car payments. The report points back to several key reasons for the growth – the booming car sales market and the increase in loans made to subprime borrowers.

That aside, having a large car payment puts you at risk if you’re living paycheck-to-paycheck and you take a financial hit. It varies by state, but this puts you at risk of repossession by the lender if you default. Such a situation can impact your job and your livelihood and is simply not worth the risk as it will hurt you both in the short and long-term.

If you currently have a car payment and need relief to lower payments, you may be able to refinance the car loan to lower the interest rate. This will lower your payment and help you pay it off quicker – assuming you don’t lengthen the loan of course. Lenders like Lightstream, Lending Club or Avant are good options to consider for lowering that rate and enjoying some relief.

Car Payments Are One of the Few Things You Can Control

 

If you listen to the ‘everyone has a car payment’ camp then you’d think large car payments are unavoidable and just a part of life. Just think about it for a second. You’re at an office gathering or dinner party, and you hear people complain about their finances.

What are some of the common targets of their ire? You’ll almost certainly hear blame thrown at taxes; the rising price of gas; how much their daycare costs; or the cost of health insurance; you’ll rarely hear complaints about car payments. Why is that? I think it’s because we accept them as a fact of life that can’t be changed. In actuality, car payments are something we can pretty readily control.

Unless you need a nicer car for your profession, there’s no reason why you even need to consider approaching something near the average car payment. Instead, opt for that reliable and practical used car like a Honda or Toyota and pocket the difference you’d pay for a status symbol car.

Sexy, no, but all you need is something that will take you from point A to point B – sexy is saving that money for your future.

The average car payment is over $500, and many happily pay it. Here are ways to lower your car payment and drive your wealth in the right direction.

Ways to Break Free of the New Car Mindset

 

Much of the average car payment problem is an appetite that’s rarely satisfied. We want the status symbol or think we need a shiny new car every few years and on and on the cycle goes.

It is possible to break free of this mindset, but it does require a change in outlook about how you manage your money. It means changing it from one that seeks to have what you actually need for the present without harming your future instead of one that seeks the status of the present at the risk of the future.

More practically, you can do any of the following to break free of the new car mindset and rid yourself of the shackles of a large car payment:

  • Buy used. There’s nothing wrong with a used car, and they can save you thousands of dollars. Buying new is simply stupid as depreciation hits you immediately.
  • Wait until you can grow your down payment to 20 percent, or more, of the car. Put your savings in a high yield savings account, like Barclays Bank, so you can earn a little something on the money.
  • Wait to buy in cash
  • Shop around for the best interest rate. Even the difference of 1-2% can increase your monthly payment to being too much of your monthly budget. I know many will argue the point of taking a low-interest rate loan and borrowing funds. I get that point, but a loan is a loan.
  • Absolutely, positively, do not tell the dealer how much of a monthly payment you can afford. They will use that information against you to get you into a more expensive car. Don’t make their job easier for them; instead, keep your cards close to the vest.

Ultimately, breaking free of the large car payment mindset requires you to look holistically at your finances. How much of what you make will be obligated to that set of wheels? How else can you use that money to help your future self? These are questions you should ask yourself as you begin the car buying process and not thinking about what others will think of you because you roll up in a shiny new car.

 

How much of your monthly income is your car payment? When was the last time you bought a car and how much did you put down? Have you ever bought a car in cash?

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more.

10 Comments

  • Good advice John. I think a lot of people forget that little fact about cars – that they are consumables. They are basically worthless at the end of their lives. I had a strict rule when I bought my last commuter vehicle that the payment had to be $200 or less. That way I knew I could double up on it and pay it down quicker if I wanted.

  • Love this, John! Car payments are not a fact of life. For many years, my husband and I assumed they were. We fell into the trap of buying a “new” car every year or two. Though we could always rationalize “why” we were getting a new one, we were fooling ourselves. It really took changing our mindset, realizing how much money we wasted and what we could have done with the money instead. We haven’t had a car payment for several years and don’t ever plan to have one again.

  • John Schmoll says:

    My wife and I have fallen into that trap as well in the past. We just took it as “normal” and went on our way to finance the given car at the time. We’re like you now, it’s all cash for us in the future.

  • Dang it John I had a post drafted up that was very similar! It takes a bit of a different approach to it, though, so I may still publish it : ) Needless to say I agree with you. It really is one of the bigger costs that you can control to a pretty big degree, regardless of your income.

  • James says:

    Great post challenging the status quo.

    One additional option, with Uber etc, do you need a car, particularly if it’s a household second car. $500 is a lot of money if the convenience/flexibility can be achieved at a fraction of the cost with ridesharing services……

    • John Schmoll says:

      Thanks James.

      That is a good point. If you live in a city that has a big Uber/Lyft presence I think there is definitely the opportunity to save without needing a second car.

  • Carrie says:

    We do not have any car payments now (but have bought new cars with payments in the past). When we started getting serious about saving we made a decision that we would not have any car payments again. We would only buy used cars for cash. Our resolve was seriously tested last year. Our son needed a car to commute to college. We found a great deal on a used car. Six months later our son totaled that car and we had to quickly buy another! Thank goodness we had an emergency fund and we were able to go out an get another used car for cash. We did get a cheque from the insurance company (several weeks later) but that did not cover the entire cost of the “new to us” car.

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