When shopping for a new car one of the first questions a dealer will ask you is – what kind of car loan payments are you looking for? If you answer that question, you just cost yourself thousands of dollars. Instead, when you buy a pay cash for a new car. In other words, you should look at total purchase price, not the monthly car loan payment amount.
Save Money On Your Car Loan Payment: Buy a Car With Cash
Let’s say you bought a used car for $10,000 and got a four year (48 month) car loan at 7.05% (car loan average at the time of this writing – see http://www.bankrate.com/auto.aspx)
The left column (below) represents your monthly car loan payment.
The right column represents the total balance you would have each month if you saved the money ($239.46 per month) at 3% interest.
| Monthly Payment | Total Savings |
| $ 239.46 | 239.46 |
| $ 239.46 | $ 479.52 |
| $ 239.46 | $ 720.18 |
| $ 239.46 | $ 961.44 |
| $ 239.46 | $ 1,203.30 |
| $ 239.46 | $ 1,445.77 |
| $ 239.46 | $ 1,688.84 |
| $ 239.46 | $ 1,932.53 |
| $ 239.46 | $ 2,176.82 |
| $ 239.46 | $ 2,421.72 |
| $ 239.46 | $ 2,667.23 |
| $ 239.46 | $ 2,913.36 |
| $ 239.46 | $ 3,160.11 |
| $ 239.46 | $ 3,407.47 |
| $ 239.46 | $ 3,655.44 |
| $ 239.46 | $ 3,904.04 |
| $ 239.46 | $ 4,153.26 |
| $ 239.46 | $ 4,403.11 |
| $ 239.46 | $ 4,653.57 |
| $ 239.46 | $ 4,904.67 |
| $ 239.46 | $ 5,156.39 |
| $ 239.46 | $ 5,408.74 |
| $ 239.46 | $ 5,661.72 |
| $ 239.46 | $ 5,915.34 |
| $ 239.46 | $ 6,169.59 |
| $ 239.46 | $ 6,424.47 |
| $ 239.46 | $ 6,679.99 |
| $ 239.46 | $ 6,936.15 |
| $ 239.46 | $ 7,192.95 |
| $ 239.46 | $ 7,450.39 |
| $ 239.46 | $ 7,708.48 |
| $ 239.46 | $ 7,967.21 |
| $ 239.46 | $ 8,226.59 |
| $ 239.46 | $ 8,486.61 |
| $ 239.46 | $ 8,747.29 |
| $ 239.46 | $ 9,008.62 |
| $ 239.46 | $ 9,270.60 |
| $ 239.46 | $ 9,533.24 |
| $ 239.46 | $ 9,796.53 |
| $ 239.46 | $ 10,060.48 |
| $ 239.46 | $ 10,325.09 |
| $ 239.46 | $ 10,590.37 |
| $ 239.46 | $ 10,856.30 |
| $ 239.46 | $ 11,122.90 |
| $ 239.46 | $ 11,390.17 |
| $ 239.46 | $ 11,658.11 |
| $ 239.46 | $ 11,926.71 |
| $ 239.46 | $ 12,195.99 |
| $ 11,494.08 | $ 12,195.99 |
Once everything is said and done, if you borrow money you will pay $11,494.08 for your $10,000 car – at $239.46 per month.
If, however, you delay your car purchase and make payments to yourself, you will have contributed $11,494.08 to yourself, but that money is now worth $12,195.99. This person then proceeds to buy a card for $10,000. If you delayed buying a car for four years and saved the money to pay cash when you buy a car you would have a $10,000 car and $2,195.00 in the bank.
How Much Can You Save On Car Loan Payment?
Now consider the difference if you did this over a life time.
Meet Sweet Sally Saver. She is a 30 year old who decides she will always make payments to herself of $239.46 per month and will always buy cars that cost $10,000. She puts the money she saves into a high interest checking account that yields 3%. She pays cash for every new car every four years until she is 64 years old. During that time she will buy 9 cars. Over the first four years she is creative – she drives an old beat up car and she uses public transportation. She buys her first car at age 34 – with cash.
Meet impatient Larry Loan Lover. He is a 30 year old who decides he will always buy cars by taking car payments and he will always buy cars that cost $10,000. At the age of 30 he goes out and gets his first car at a 7.05% loan with a payment of $239.46. He buys a new card every four years until he is 64 years old.
In the chart below I’ll illustrate how much money Sweet Sally Saver is able to accumulate just by waiting an extra four years and paying cash for every vehicle she owns.
| Larry Loan Lover Auto Account Balance |
Sweet Sally Saver Auto Account Balance | |
| Car 1 | $0 | used old car |
| Car 2 | $ 0 | $ 2,195.00 |
| Car 3 | $ 0 | $ 4,665.49 |
| Car 4 | $ 0 | $ 7,446.05 |
| Car 5 | $ 0 | $ 10,575.59 |
| Car 6 | $ 0 | $ 14,097.92 |
| Car 7 | $ 0 | $ 18,062.33 |
| Car 8 | $ 0 | $ 22,524.31 |
| Car 9 | $ 0 | $ 27,546.31 |
At age 64 Sweet Sally Saver now has $27,546.31 in her auto savings account. Poor Larry Loan Lover has nothing. Most importantly, for all but the first car purchase (4 year period) Larry and Sally drove the exact same cars.
For a period of 30 years they drove the same make, same model, same price car – but Sally now has an extra $27,546.31.
How Much Should You Pay For A New Car?
Hopefully you already have and use a budget. Dave Ramsey uses the general rule that your cars (including all motor vehicles) should not add up to more than half of your take home pay. Another rule of thumb is that your total car costs should not exceed 15% of your take home pay. This amount includes everything from payments, to gasoline, to repairs, to insurance. You vehicle cost should fit within the recommended percentage budget allocation.
Now you tell me. Do you want to go and buy another car on monthly payments?
Related Articles Posted On Other Websites- Save Time, Money and Space in Over 80 Ways
- How Should I Spend My Money?
- 40th Money Hacks Carnival
- My 25 ways to save money-the small things add up!
More Great Articles:
- Does Spending Cash Really Save Money When Compared to Using a Credit Card?
- Credit Card Advantages Over Cash
- Student Loan Payments When Poor
- Credit Cards Vs. Cash: Do I Really Spend More With Credit?
- What To Do When You Have A Late Estimated Tax Payment
- Student Loan Debt Forgiveness | For Ministers & Non-Profit Workers
{ 9 comments… read them below or add one }
Never saw it described that way. Good point.
I will never buy a new car…a big loss considering depreciation.
.-= Ken´s last blog ..Weekend Roundup =-.
The math is sound here; and I completely agree with your ideas. But you should note that most people that pay with cash do so for many more reasons other than pure finances. For one thing, people that pay cash tend to pay much less for cars than those that borrow. (what’s a few extra dollars a month matter? THOUSANDS, that’s how much!). Secondly, most people feel weighed down by the debt of a car. I’ve been there, and I won’t go back. I had to get out of it as soon as possible, and don’t plan to ever borrow again for a car. It’s very satisfying to purchase a vehicle and know you own it, and don’t have to send a check to the bank every month.
Also, please, please tell me that people don’t really pay 7% on a car loan. Where are these people getting loans at, Vinnie the Shark? That’s the average? That’s just unreasonable.
I can’t wait to pay off my car and try Dave’s “Drive Free – Retire Rich” pattern. There is also a negotiating power that comes with cash. So chances are you’ll get that car for cheaper than if you were financing.
@Infinion
Thanks for your comment.
I completely agree that there are also some non-financial advantages to paying cash for cars.
I’ve heard that people pay less when they pay cash. I paid cash for my first car, financed my second, pay cash for my third and fourth. Honestly, I personally didn’t feel like paying cash gave me a much better deal. This could be because I bought cars through private owners and the form of payment was never discussed until the deal was set.
7% – that’s the number. It is crazy.
@Lakita
Paid for cars do drive better than cars that are financed.
@Ken
Buying brand new cars is crazy expensive. There is a huge depreciation. Sounds like a good blog post for the future .
Actually, I wasn’t even considering getting a better deal with cash at purchase time. Although that may or may not be true. It certainly does change the tone of the purchase negotiations though. You can talk to the salesman in real numbers instead of payments, which as you know, he can set that payment at almost any number to make the customer happy. If you find a reasonably honest salesman, they’ll be willing to tell you just about how far they can go down while still making a profit. They’re usually willing to do this after a while, because when you have cash, they know you’re ready to buy today if the deal is what you’re looking for. I’ve found that being completely honest with the salesman *usually* results in better luck.
But, as for the sale price, what I was really referring to was the ‘credit’ effect. Some people say that no one should use a credit card because you tend to spend a little bit more when you’re not handing over cash. I use credit cards everywhere almost exclusively (but I’ve never had CC debt), and I completely agree that I probably spend more than I would if I used cash alone. Obviously, you’re unlikely to hand over a wad of cash at the dealership, but the premise is the same. You know how much you have, you know what you want, and how much you’re willing to pay for it. It makes it easier to walk out the door if you can’t get the car for the right price; you simply can’t make money out of thin air after all! But when you go in with the intent of financing, sometimes it’s just so easy to pay a few more dollars a month to get that special vehicle. I know, I’ve done it before. So often i hear ‘I got what I wanted, and I only pay a few more dollars more a month that what I wanted to.’ Okay, sure, but how much more did the car actually cost that you were willing to pay? Did it end up costing more than it’s actually worth? Do you even know how much its worth? Do you even know how much it cost???
I’m with you. Yes, I think you are exactly right about the spending with credit.
My vehicle is my stupid tax. $900 to go and God willing, no more car payments for me ever again.
Dave Ramsey says if you are not a millionaire you can’t afford a new car. I say if you have to finance the car, you can’t afford to buy it. Pay cash for forget it.
Wow, This is definitely finance in layman’s term, great article, I know there would be savings if you bought a car with cash, but I never thought it would be that big. And the 7% interest???? just got me speechless, no wonder people are in so much debt. When I’m buying a car, it’s definitely going to be cash…thanks for the heads up!
.-= Michelle´s last blog ..Merchant Advances: 10 Things You Didn’t (But Should) Know =-.
Having cash is always best. You would all be surprised if you knew how many people with bad credit are willing to pay higher percentage rates for a used car.
{ 6 trackbacks }