Eliminate Car Payments From Your Life (And Never Go Back)

Learn how to eliminate car payments for the rest of your life by paying off your car loan and saving cash for the next car. I made the mistake of getting a car loan after 11 years of no car payment. I regretted it. If you want to get serious about taking control of your financial life so you can build wealth, it’s time to eliminate car payments.

Car payments are a persistent nag on the lives of many U.S. consumers. But they don’t have to be, and shouldn’t be even with super-low interest rates. Because they crush your monthly cash flow.

According to Experian, the average loan amount for new cars in the U.S. as of Q1 2016 was $30,032. The average car payment was $503 over 68 months. The percentage of new cars that are purchased with financing is 86.3%.

Financing a car purchase is normal.

Last year, I succumbed to the temptation of a low-rate car loan after 11 years of no car payments. And regretted it.

The payment disturbed my financial mental well-being for more than a year and crippled my cash flow. So I decided a few months ago that I had enough.

It was time to change shit up.

Last week I paid the loan off in one $12,852.20 chunk payment. The loan is gone. The title is mine.

Now I’m swearing off car payments for the rest of my life.

Why I Financed Our Minivan In the First Place

I eliminated car payments from my life in 2004. Two-and-a-half years earlier, I bought a new Toyota Echo for around $13,000 with no money down and a $221 payment (4.59% interest rate).

I hated that payment. So I aggressively paid off the 66-month loan in 30 months.

That car gave me nine years of reliable service. Seven of those years were payment-free.

After marrying and while preparing for the arrival of our son, Mrs. RBD and I bought a new base model Honda CR-V. We paid cash.

I remember her saying, “Wow, I really like not having a car payment!”.

Yeah, it’s pretty awesome.

When we had our third child, we decided we didn’t want to squeeze three car seatsin the back of the CR-V. And we knew we needed a long-term solution for our family size. So we sold my wife’s “brand new” 11-year-old Honda Civic and bought the ultimate suburban grocery-getter… the Honda Odyssey.

With a price tag approaching $30,000 (for a low-end model), I wasn’t crazy about putting all that cash into the car when I could get cheap financing. For qualified buyers, Honda offered a 0.9% rate for three-year loans. That was too tempting to pass up. So instead of parting with nearly $30,000 in cash, I put down $9,000+ and financed $20,000. Our monthly payment for 36 months was $563.

The $20,000 I “saved” by financing the car went into the stock market between July and October 2015. This was an excellent time to put money to work in dividend paying stocks. Mathematically, the move was the correct one. The stocks I bought are mostly up and I’m wealthier because of it.

The major downside was that $563 payment.

After just a few months of the regular payment, I started regretting my decision to finance the car. Interest on the loan was minimal. But the car payment had a bone-crushing effect on my cash flow.

I HATED the payment!

I Screwed Up (so take it from me)

Having no car payment is empowering. The cash flow opened up by a lack of car payments gives you flexibility to invest and grow wealth.

I forgot how shitty car payments are after 11 years of not having one. Mathematically, I was ahead by investing in dividend stocks yielding more than the loan rate. That’s how I justified it. The math was sound, but the payment made me feel poor.

We’re a one income family. So our cash flow is important.

The low rate made the loan somewhat tolerable from a numbers standpoint. But it strangled my cash flow.

As a result of this mistake, I’m swearing off car payments for the rest of my life.

That sounds well and good. But I need to ensure I won’t fall into the low-rate trap again by starting to save now for the next car.

To help you avoid car payments for the rest of your life, I’m going to lay out, specifically, my strategy for eliminating the Odyssey payment and how to avoid getting one in the future.

Eliminate Car Payments With a Lump Sum for Low-Rate Loans

Eliminating car payments seems as straightforward as paying off any old debt. Snowball or avalanche, right? Either of those strategies is fine for higher interest rates. But I deployed a different strategy for paying off this car loan. Since the rate was so low, the monthly interest cost was minimal. So I was comfortable letting it ride until I built a lump sum to pay it off.

Why pay it off with a lump sum?

Mainly to manage risk. If I aggressively paid down the loan each month, I’d make progress on the balance but spread myself a little thin on flexibility. Paying down the debt early wouldn’t actually save any money since my money market account yields more than the loan rate of 0.9%.

Building the payoff fund came mostly from cash flow, a work commission check, and an extra paycheck (I’m paid bi-weekly so I get 26 paychecks per year). I also sold Caterpillar (CAT) and moved the proceeds to cash.

By waiting until I had the cash to pay off the loan, I maintained flexibility in case a more urgent need for the money emerged.

Once I had enough cash to pay it off, I reevaluated my decision to make sure it was correct. That’s what I did last week.

One way to look at paying off debt is as an investment and return on cash flow. By paying off the loan, I was making an “investment” of $12,852.20 against the loan balance. That payoff amount would yield $563 in cash flow every month, or $6,756 per year. Even though the interest rate was just 0.9%.

$6,756/12850 = 53% annual return.

From that perspective, it makes total sense.

But that return is only for 21 months, the time left on the loan. More importantly, I can take the $563 and invest that amount.

Now, of course, I could alternatively take that $12,852.20 and invest it in dividend stocks for the next 21 months. I can easily find stocks that yield higher than 3%. Or I could invest it in Lending Club notes. So why not?

I have a one-word answer for that:

Discomfort.

The car payment was weighing on cash flow AND my brain. So I threw out the math and just paid the damn thing off.

I’ve never regretted paying off a debt.

My Rate was Super-Low… Yours Might not be

First of all, if you spent too much money on a vehicle, darlin’ you gotta sell the truck! I don’t have a rule of thumb here. Don’t be stupid about it. If you make $50,000, don’t buy a new BMW or Acura. Buy used or something new and cheap. Never lease a car.

If your interest rate is higher than, say, 4%-5% or so, you could start paying the debt down on a monthly basis instead of a lump sum. Assuming you don’t have higher rate credit cards or other debt somewhere else. Don’t dig into your emergency fund to pay it off.

If your rate is higher than 5%+ and you can’t pay the loan down quickly, you might benefit from looking into refinancing the loan. LendingTree is one reputable place to get competitive rate quotes. I used it for refinancing our house. Quotes are free.

Or don’t bother refinancing. You can use the high interest rate as motivation to get your ass in gear and pay the thing of.

Eliminating car payments from your life may take a few years. Work to pay off your current car and drive it into the ground. Then plan carefully for how you’ll pay for the next one.

How to Avoid Car Payments for the Rest of your Life

You can move somewhere you don’t need a car. Obvious… probably doesn’t work for most of us. Another method is to drive your current car for as long as possible. Maintaining a car is usually way cheaper than buying another. But eventually, it will become unreliable.

As I was signing the paperwork for the Odyssey, the financing guy pushed a hard sell on an extended warranty.

He had a solid pitch. The warranty would cover just about anything that could go wrong for eight years. I negotiated his price for the warranty down from $2400 to about $1300. But I didn’t buy it.

The salespeople talked about how reliable Hondas are. Then here’s this guy telling me all the things that could go wrong!

The pitch angered me. So in response, I started my own “warranty” fund. I put $1,500 of my own cash into a new high-interest savings account to set aside for major maintenance issues. Each subsequent month I automatically added another $100 to the account. Over time, the fund should grow to sufficiently fix any major issues, AND build the fund to eventually help purchase our next car. This fund is on top of my normal emergency fund.

Not to mention, it saves the price of the warranty. The guy selling it said about 85% of his buyers get the extended warranty.

But now that I’m never getting another car payment ever again, I’ve upped the monthly savings amount to $200. I estimate that about 6 years from now when our CR-V is ten-years-old, we’ll have $15,000 (minus any serious maintenance issues that could arise) saved for a newer car.

That gives us a nice cash chunk to put down on a new car. Our next car will likely be more of a commuter car suitable for a teen driver. Maybe electric?

The downside to saving so much cash for a future car is that the return on cash is capped at the money market’s interest rate. I’m comfortable holding cash even at low rates. It’s still a small percentage of my net worth. More challenging is having the discipline to not touch it. In a pinch, it can always be moved around, but that defeats its purpose.

Build a car fund to simplify your life by helping to eliminate car payments. It decreases overall personal financial risk and gives you that warm fuzzy feeling that you’ll never need to finance a car again.

Conclusion

Paying off a low-rate loan early and creating a cash account to pay for the next car may be too conservative for some readers. I get that.

Perhaps I’m foolish to pay off 0.9% financing. As I said, by the math, I’m wealthier since the investments performed. Sometimes they don’t.

But paying off the loan frees up a lot of monthly cash. Cash flow is king.

The strengthened cash flow position will help me grow wealth and investment income between now and the year I need to buy another car. Before then, my day-job income should increase, Mrs. RBD may start working again, and we should be in a better financial position overall.

Most of all, I paid this loan off to be more comfortable with our financial lives. We try, at every turn, to give ourselves more flexibility to pursue the lifestyle we desire. We want fewer things, more free time, and more options for our family’s future. Eliminating this car payment was a corrective step toward our end goal.

Have you eliminated car payments from your life or fallen into temptation? What’s your take on minivans and the suburbs? Am I crazy for spending so much on a vehicle?
Featured photo via Pixabay CC0 Public Domain.

26 Responses to Eliminate Car Payments From Your Life (And Never Go Back)

  1. droubal49 October 12, 2016 at 8:10 am #

    Avoiding car payments is a worthwhile endeavor. Paying cash for a vehicle means you are unlikely to buy an overly expensive vehicle, like BMW, or Acura.
    My approach has been to buy used. I like one-year-old vehicles. They have been tested by someone else, but have less than 15,000 miles and look like new vehicles. We have had three minivans and I have found that Chrysler offers the best value. Honda and Toyota may be incrementally better, but you will likely not notice the difference and the Chrysler vans are several thousand dollars cheaper. I generally pay half down in cash and finance the rest through a credit union for 5 years at 2 to 3% interest. Then I pay the loan off in three years.
    Loan payments are generally about $250 per month for a very nice vehicle.

    This year I started a Lending Club account. With higher quality loans it pays nearly 10% interest. Looking at historical returns, on their site, I believe I can expect at least 7% over the long run. That will be my car purchase account. I will still probably follow the same pattern of half down and finance the rest, since I can earn so much through investments.
    Thanks for a good article.

    • Retire Before Dad October 12, 2016 at 9:05 am #

      Thanks Droubal,
      A long time ago, my Dad bought a Pontiac Sunbird. It was such a shitty car that it didn’t last past 70,000 miles. Many of our friends and neighbors bought Hondas and Toyotas and they lasted for more than 150,000. Had my Dad bought a better car, I would have had my own for high school. He stopped buying American cars, and many other US consumers did too.

      I know that US car manufacturers have upped their game, and that most US cars are as good or nearly as good as the Japanese auto-makers. But it’s something that stuck with me. I’ve been happy with the Hondas we bought, and so I’ve continued to buy them. So I didn’t even look at the Chryslers, even though they invented the minivan. Maybe I should have to saved a few thousand.

      I looked into buying used. But what I found was that the higher end models are more readily available and the base models were in high demand. At least in our area. So the price was not all that cheap compared to something new. We could have bought the same van in in a higher end model, and it would have cost $46,000. That’s leather, navigation, entertainment system etc. I just that buying all the bells and whistles is crazy.
      Thanks for chiming in.
      -RBD

  2. Chad Carson October 12, 2016 at 8:26 am #

    Good article, RBD! I’ve never had a car loan, and I don’t have plans to ever get one either. One of the most popular articles ever on my site was “How to Retire Rich With Embarrassing Old Cars and Ugly Houses.” In the comments we had a lot of fun discussions about the true costs of used vehicles vs new. My point was of course to drive the beater!

    I also get the math that .9% money is cheap and should be invested, but I don’t like to play those games with my personal debts. When I get 3%, 30-year real estate investment debt, that’s another story. But personally the math formulas don’t take into account the fluctuations (and risks) of life very well. As nerdy as we are with formulas and spreadsheets, our life is not a formula. At some point we have to give ourselves financial space for flexibility and growth. That for me is not having personal debts.

    My wife and I are even considering paying off our home loan soon. It’s not the right financial move (getting 6% on well-secured private notes, paying off 3% note on home) but we really like the reduced risk and hassle. And we’re at the point where growth is still important but not as critical, so those other factors start becoming more heavily weighted.

    Thanks for laying this topic out so clearly. I’ll now have an article to send people to when we discuss paying off their car loans. Cheers!

    • Retire Before Dad October 12, 2016 at 9:17 am #

      Hey Coach.
      I remember tweeting that article of yours and people really liking it. Here’s a link for anyone that wants to check it out. I’ve driven beaters before. But want more reliability now that we’re lugging kids around.

      You’re one step ahead of everyone else never having a car loan. There’s comfort in lowering recurring payments. But cars are certainly different than real estate debt, that is for sure. We are not in a position to pay off our house yet. We just refinanced to a 3.375% and we’re going to let that ride for a while. But I do aspire to pay it off in 15 years. If you can pull that off at a young age, that would certainly propel you into early retirement!
      -RBD

  3. The Green Swan October 12, 2016 at 8:35 am #

    I don’t disagree with your psychology of not wanting a car payment anymore, I think that is normal and I’m fairly debt averse similarly to you. I went about 10 years without a car payment as well until my wife and I decided to step up our car situation for our growing family. While we saved up the cash to pay for the car upfront, we ultimately decided to finance it since we could get a very low interest rate. While I look forward to being free from my car payment, I haven’t necessarily had the urge to pay it off early (it has been a year). Since I’m getting such a good rate and expect to easily be able to beat it with my investment performance, I can’t convince myself to make a lump sum payment.

    • Retire Before Dad October 12, 2016 at 8:40 am #

      GS,
      Wow, we’re in a very similar situation. I felt the same way you do when I bought the car. But it changed after a few months. I prefer the cash flow, even though the math is in your favor. Being a one income family, we need to keep our payments low. That’s what ultimately changed my mind. I feel much better about our financial lives now that it’s done. Thanks for weighing in.
      -RBD

  4. Pets to Go October 12, 2016 at 9:14 am #

    This is awesome, and I concur completely. We are on our second car purchased outright, i.e. no loan. Both cars were bought used, under 3 years old. When negotiating I made sure the salesman knew I wanted the lowest price…and we’d discuss financing when our price was met. Often the sales personnel will quote a lower price if you’re financing, as they will receive more on the back end (the loan payments). They were shocked when I told them I would be bringing in a check for the full amount – just under $30K. Having no payments is financial freedom.
    In 2000 my husband got a new job. He was very aware of the foaming dot-com markets and was nervous of consequences to our 401K balance. Against our accountant’s advice we took the money and paid off our mortgage in full – 5 years after building our home. Sure enough when the financial debacle hit we calculated an over 40% slide – we had aggressive funds for our younger ages. There was time to rebuild with his next job – and a fortunate small pension. No regrets at all. After 19 years in our house we have hit the reset button for many items, appliances, HVAC, windows, etc. So far we have managed to upgrade and repair using savings – cash.
    He’s retired and I’m working for our health insurance benefits. Still saving, investing, growing that diversified retirement bucket with few worries that we’ll be financially healthy for future car buying.
    ps – would love to see an article on learning to pre-save for other items such as annual or bi-annual insurance bills, energy payments, etc. I worked – one bill at a time – to gradually get everything on a pre-saved basis so that when that 6 month or annual bill came in, I already had the cash for it. And I was better able to clearly see how much was left over at the end of each pay period to invest with.
    Great article!

  5. Tim N October 12, 2016 at 9:21 am #

    I did the same thing as you. Had something like a .9% rate – i can’t remember exactly but it was low. Had the same arguments as you when I signed the paperwork and a couple of years in I paid it off for the same reason as you – got sick of watching the payment get sucked out my bank account each month.
    I am currently paying off our mortgages at an advanced rate (2 rentals and our home). I’ve started on the rentals because the int rate is slightly higher but all are still low. The rentals are at 3.65% and our house is at 2.92%. These are all 7 year ARMs and we are 2 years in. We don’t mind the arms because we are paying to be debt free by the time the 7 years is up. I have though increased the rate substantially to try to get them paid off in 3 1/2 instead of 7 years. I have been making the payments directly to the mortgage, but I like your idea of paying the funds into a “holding account” like you did. My only problem is that I can’t find anything that would beat even these low rates. I’d be interested in your thoughts. Thanks

    • Retire Before Dad October 12, 2016 at 9:35 am #

      Tim,
      Those are low mortgage rates all around. Nicely done. Sounds like you’re handling it well. If the loans aren’t that big and you’re planning to pay them off before the ARM is up, then I’d probably automate the exact amount that would pay them off by the end of the term. You can always add more or chunk off that last bits at the end.
      -RBD

  6. Fervent Finance October 12, 2016 at 9:49 am #

    When I was 21 I was making $50k a year at my first big boy job. So I obviously deserved a nice car to commute in! I bought a used Cadillac CTS for $17.5k (I haggled it down a little of course). I put $3k down and financed the rest at 6.3% if my memory serves me right. Luckily I knew debt was bad and paid it off in about 2.5 years. I sold that car when I moved to Manhattan in 2014 and haven’t owned a car since! I assume I’ll eventually need to buy a car again. But this time I’ll pay with cash out of my savings for a nice used fuel efficient sedan 🙂

    • Retire Before Dad October 12, 2016 at 12:25 pm #

      FF,
      $17.5k for a first new car isn’t terrible. For that price, I’d go new. Moving to Manhattan though, I think the cost of living increase beats out the car payment. Planning to write about the cost of geographic locations soon. Manhattan is just about the worst! Guessing your income is strong though.
      -RBD

  7. Route To Retire October 12, 2016 at 10:59 am #

    I applaud you on paying it off. Cars are just such a waste of money and then the financing just adds to it to really push you down from ever reaching FI.

    Once I graduated from college, I always bought new cars and financed them over 5 years. That includes my my most recent car which I bought in 2009 and my wife’s car in 2011. We actually paid them both off a number of years ago, but we’ve recently talked about it and decided never to buy new again. We’ll run these until they die and then buy cars that are 1-2 years old and pay with cash.

    — Jim

    • Retire Before Dad October 12, 2016 at 12:33 pm #

      RTR,
      Good goals to have. As I’ve said, I’m not anti-new car. I know they lose value in that first year. But I’m more comfortable knowing that after 10 years of ownership, I know exactly how each mile was driven and all the maintenance that was done. The key to buying new is buying a base model. Leather, fancy navigation, entertainment and all that garbage is really expensive. We actually bought one up from the base model to get automatic doors. It’s critical when dealing with three young kids.
      -RBD

  8. brian503 October 12, 2016 at 12:42 pm #

    We had a Honda Odyssey for years when our three children were younger and in car seats. It was a great car. I really like the idea of buying gently used cars (2-3 years old) with cash. A big chuck of the vehicles deprecation is over and you are shopping from a place of leverage. We have three paid for cars and I plan on never having another car payment.

    • Retire Before Dad October 12, 2016 at 2:38 pm #

      Brian,
      Nice. Good to hear you’ve sworn them off too. Yeah, even though the CR-V is fairly big, only certain types of car seats fit three in a row. Then there’s the issue of fighting. And they grow bigger eventually. No surprise, the suburbs are filled with the vehicle. We figured the need was very long-term, so we’ll likely drive it for about ten years. By then, cash only for sure. Thanks for sharing on Twitter!
      -RBD

  9. fdaradmin October 12, 2016 at 12:56 pm #

    I see paying off cars and houses as pretty much the same thing. One may be able to get more return somewhere else but being debt free is a real confidence booster. You walk differently when you dont have car payments and house payments to deal with.

    • Retire Before Dad October 12, 2016 at 1:31 pm #

      Debt is debt, any way you slice it. Some obviously “better” than others. Being debt free is a powerful thing. Congrats if you’ve made it.

  10. KAREN M WHETSEL October 12, 2016 at 2:08 pm #

    Great article. I know so many people who believe car payments are a way a life and my financially poorest friends/family members are the only ones that usually buy brand new cars. (Hence my brother with a newer model Range Rover and a $42k annual salary – yikes!) I try to impart my “financial wisdom” as best I can, but unfortunately it’s usually ignored.

    My husband has a 2001 Lexus GS400 with 250k miles, paid for long ago. Gas hog, but we only drive it once or twice a week. I have a 2007 Toyota Matrix with 184k miles, that I paid cash for when it was brand new due to an inheritance, I’m sure that is the only brand new car I will ever have. That being said, we will drive those cars until they die, like really die. We keep them looking nice and keep up the maintenance up so we are not driving around junkers. I don’t care for payments, I feel like I’m chained to them when ever I have made the choice to get one (car or otherwise).

    We do have a sinking fund to save for a car replacement as needed. He wants a Honda Pilot (yikes). But we plan to move closer to public transportation next summer and I’m hoping to eliminate one car (good-bye Lexus). Let the negotiating begin at our house…

    Karen in San Diego (great weather, terrible traffic)

    • Retire Before Dad October 12, 2016 at 2:35 pm #

      Karen,
      Good luck with those conversations in your household. Sounds like you and your husband are fairly conservative with cars. Especially if you go down to one and move toward better public transport. We have some public transport nearby, and could move somewhere better for it. But we’d give up school quality for our kids. A bike is on my list of needed purchase items. Sold my crappy on a few years ago.

      I was in San Diego a few weeks ago and can’t say I experienced the traffic. But the weather was, unsurprisingly, perfect.

      Thanks for your comment!
      -RBD

  11. Dave October 12, 2016 at 2:41 pm #

    Why not forego the money market and buy some higher yield dividend stocks like T or VZ? It doesn’t sound like you’d be in a position to need the cash anytime soon, so market fluctuations aren’t really a concern.

    • Retire Before Dad October 12, 2016 at 2:46 pm #

      Dave,
      I do own plenty of stocks. Check out the Portfolio tab. As I age, and with kids, and with a desire to have more options in life, I’m OK having cash in the bank. It’s still a small percentage of my net worth. And I can always change my mind a put it to work. But the idea of putting all of my car fund cash into one stock would make me uncomfortable. Maybe an index or dividend ETF might be a better fit for me.
      -RBD

  12. Our Next Life October 18, 2016 at 12:56 pm #

    We’re totally with you on HATING car payments. When we bought our Subaru a few years ago (brand new, from the dealer), their heads nearly exploded when I insisted we were going to pay cash instead of financing it. (Also, random aside — it felt a little crazy that they eventually let me drive the car off the lot with nothing more than a little piece of paper (a check) signed by me.) Your point about the cashflow getting tight with a car payment is certainly an important argument, but there’s also just the psychological weight of having this debt hanging over you. I didn’t realize what a weight I was carrying around from the loan on my first car until it was paid off, and I decided at that moment that no mathematical argument was ever going to convince me to take out a loan if I didn’t absolutely have to. I know a lot of people are comfortable doing what’s best on paper (low interest rate loan = more money to invest, technically), but I completely fess up to letting the emotional factors dictate these decisions.

    • Retire Before Dad October 18, 2016 at 8:56 pm #

      ONL,
      Subaru… so small mountain town 🙂 Just heard an interesting Planet Money podcast on them. A friend of mine has a Subaru and place in a resort town in CO. We joke “you’ll know it’s us when you see the white Subaru wagon”.

      This decision was psychological, in part. It was a weight, even with the low rate. It was sucking the life out of our budget. Feels good now that it’s gone. Next month we should see a nice bump in savings!
      -RBD

  13. networthisking October 30, 2016 at 4:36 pm #

    Love this. In addition to limiting cash flow, I think investing to offset debt interest is very risky. For example, what if there’s an emergency during a market downturn and my only choice is to access the money i have invested while it’s underperforming? I find this idea scary.

  14. savestacks November 6, 2016 at 1:27 am #

    Nice post, we are currently car payment free and have been for about 6-7 years, actually can’t remember when I had a car payment last. I’ve saved up a bunch of cash to buy a car without using financing, but now that I have 35k saved I really don’t want to blow it on car. Way hard to spend lots of money with cash compared to payments.

  15. Daniel November 9, 2016 at 11:45 am #

    Similar math to what you described but in our situation we chose to keep the car payment for cash flow purposes. Even though we have a monthly outflow, we prefer the liquidity – even though we could pay it off. In an extreme case, if I lost my job, I would rather have the money available and keep making payments than to have paid off the vehicle and have the money locked inside of a depreciating asset

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