Why Your Car Payment is Destroying Your Financial Future

Some of the links in this post are from our sponsors. Read our disclosure to see how we make money.

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.

Supercharge Your Savings Today!
Start earning more on your savings right now with CIT Bank. They pay .50% interest on your money market balance, which is 9 times the national average, and charge no fees, which helps you save more money faster.

Enjoy quick and easy access to your money, which is FDIC insured up to $250K. Start saving today with as little as $100!

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.

*Related: Not certain if you should buy or lease? Check out our leasing a car vs. buying a car guide to learn which is best for you.*

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 Fiona let you refinance or consolidate the loan into a lower interest rate loan. Doing so will likely result in savings and help you pay off the debt sooner.

Fiona lets you compare up to 17 lenders at once, in under a minute. Within a few seconds of providing your information they show you the best lenders to work with to lower your payments.

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.

*Related: Did you know it’s possible to get free gas? Check out our guide on the best ways to get free gas gift cards and lower your fuel costs.*

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, 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?

The following two tabs change content below.

John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.

Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.

Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.


  • MyMoneyDesign says:

    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.

    • John Schmoll says:

      Completely agreed sir! I think that’s a good, general rule to have. I think if more followed something like that they’d be much better off.

  • Amanda @ centsiblyrich says:

    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.

  • DC @ Young Adult Money says:

    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.

    • John Schmoll says:

      Ha! Sorry about that. 😉 Completely agreed, it’s one of those things you have relative control over – doesn’t make any sense to over buy.

  • 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.

    • John Schmoll says:

      Glad to hear your son was ok & that you were able to cover the “new” car with your EF. I plan to never have a car payment again, it’s a waste of money.

  • D Martin says:

    My dad gave me good advice when I first started into the working world. “Never have anything that requires a monthly payment that you can’t make in one paycheck” (car payment, rent, etc.). I was getting paid weekly so my first car payment had to be able to be made in one weeks check. That would leave me 3 paychecks during the month that was used for other expenses. I’ve stuck with that advice over the years and it has served me well. I’ve passed that advice on to my children.

  • Terry says:

    in 1999 I paid cash for my Toyota 4Runner, and did not have a car payment for 13.5 years, when I sold it for $6000 and then bought a 2013 Acura RDX with $20000 down, and financed $17259 and paid that off in two years, and haven’t had a car payment in 3.5 years. I am turning 50 this year, and will max out my 410k with $24000 or $2000 a month, only possible with out the monthly car payment and reduced car insurance premiums compared to constant new cars

    • John Schmoll says:

      That’s awesome Terry! We max out our 401(k) as well and decisions like not having payments or buying new cars is a big part of the reason why we’re able to do it.

  • Wally1 says:

    This is a topic I know a lot about, having owned over 50+ vehicles in my life. I have never owned a new car or truck. New vehicle purchase is one of the worst investments or expenses you can make. What amazes me is that a vehicle is usually the second largest expense (residence or property is 1st) however many people know nothing about their cars or automotive related issues. Educate yourself about vehicles as you would your investments or other financial matters, you will save thousands. Newer vehicles are expensive to repair, most people cannot afford a major repair after the warranty is over. I buy these vehicles all the time for cheap, fix them myself and can make 2 to 4 k a month as a side line hobby. Many newer vehicles have electronic issues that can be fixed with used parts. Just my opinion. I love classics and never lost a dime on older vehicles. I digress, again education is the key.

  • EJK says:

    I made a mistake with an expensive car lease a year ago. I’m fine making the payments but ridding myself of the $620 a month in two years when the lease is up will be nice. I’m looking forward to walking away from the lease and buying a nice used Honda Fit or something as a commuter car! I hope to have at least 50% for a down payment by then so the monthly payment will be miniscule.

Leave a Reply

Your email address will not be published. Required fields are marked *