How to Put an End to Car Loans Forever

October 24, 2013

car loansFor most people, a car loan is the single biggest debt payment they make each month – right after the mortgage payment. But what if you could put an end to car loans forever? How much would that improve your household budget, and your financial situation overall?

With the high cost cars today, is that even possible? Yes! And here’s how you can do it.

1. Start by buying no more car than you can afford with cash.

Most people handle the car buying decision completely backward. They start with a certain model and price range in mind, and go from there. Those parameters are usually dominated by emotional factors and preferences – not finances. As a result, you buy more car than you can actually afford and you end up with a loan.

That puts you on the new car loan treadmill – you take a loan to buy a car, and as soon as the loan is paid off you buy another new car. The result?

Perpetual car loans!

The best way to prevent that outcome is to not get on the treadmill in the first place. Buy a car that you can purchase for no more than the amount of cash you have available to pay for it. If that means a $2,000 “beater,” then that’s what it means. But it also means that you will have no car loan.

Sure, it may cost you anywhere from $1,000-$2,000 in annual repair bills to keep an old car running, but compare that to the $5,000-$6,000 that you’ll have pay to make monthly payments on a newer car.

Buy an inexpensive car for cash, save your money, and as your savings grow, you can trade up on the car you have – without ever having a loan on it. And my guess is that paying those repair bills won’t feel nearly as bad when your bank account is full.

2. Consider appropriate steps for your current car loan.

Obviously if you already have a car with a loan attached to it, it won’t be practical to sell it to buy a less expensive car – unless of course your back is up against the wall, financially speaking. If it is, then you’ll have to do whatever it is you need to do.

But if you do have a loan on your car right now, the best thing to do is to simply pay it off. One of the biggest advantages of car loans is that they have a limited term, generally anywhere from two years to six years in length. That means that if you do nothing else but make the payments on time every month, eventually the loan will go away. But if you want pay it off early, you can always make additional principal payments just as you would with any other type of loan.

The idea is to pay the car off once and for all, and to vow never to borrow for a car again.

3. Keep your car until you run it into the ground.

Once your car is finally paid for – or even if the last car that you bought was a beater – drive it until it can’t run anymore.

No matter what we think about older cars, the truth of the matter is they will usually continue to run for long as you’re willing to fix them. That means you can keep an older car going quite a long time after most would get rid of it.

That will set you up nicely for the ultimate strategy that will enable you to buy a car – any car that you like – and to buy it without using a loan.

4. Pretend you have a monthly payment, but put the money in the bank.

So what’s the purpose of driving a car for years without having a payment?

Simple. While you are driving the car without a loan, pretend that you actually have a payment to make – but make it to yourself.

Let’s say that you’re paying $400 per month on your car, but you just made the last payment and paid off the loan. Since you’re in the habit of paying $400 per month, direct the money into a dedicated savings account. That account should be specifically earmarked for the purchase of your next car.

Rather than making the payment toward a car that you bought in the past, you’ll instead pay yourself for the next car that you will buy. You’ll turn the whole car buying arrangement around completely.

If you follow this policy religiously, you’ll eventually be able to buy any car that you want – and own it free and clear. You won’t have a car payment tearing into your budget every month, and more important – you’ll be keeping yourself ahead of the game by saving up money for the next car you buy.

Follow that strategy, and you’ll be putting an end to car loans forever.

Do you have a car loan? When are you planning on getting rid of it? What could you do with all that extra money? Leave a comment!


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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One Response to How to Put an End to Car Loans Forever

  • Carole Osselaer

    In your article you make a case for being free of monthly car payments by saving the amount monthly that you would be spending on a car loan. Saving the $400.00. for the next car that you would be paying . Except that you really aren’t free then from that $400.00 monthly “payment” now, you are paying yourself the monthly $ is still $400.00 out of your monthly budget. Yes, you aren’t paying interest but the article is tell you how to buy a car without taking out a loan, not freeing up $400.00 out of your budget.