Car Loan Payment or Pay Cash For A Car?

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.

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.

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?

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