*This post may contain affiliate links, please see my disclosure
I believe that car payments are single-handedly keeping the middle class BROKE.
If you have a car payment, PLEASE read below, even if only the MATH part (it might make you sick….).
You are losing more money than you know, and something needs to change.
Table of Contents
Car Payments Are Bad, Here’s The Math
According to Experian, in June 2018 the average car loan amount was $31,455, and the average monthly payment was $523! And what’s more, the average loan given is a 72-month loan, which means people are paying on these vehicles for 6 years.
So let’s play with some math to see how much you will end up paying for a $31,000 car.
Car Loan: $31,455
Interest Rate: 6.1%
Monthly Car Payment: $523
Loan Term: 72 Months
Using this handy BankRate True Car Cost Calculator, you will end up paying $37,640.61 for a car purchased at $31,000.
You just lost over $6,000.
Depreciation: The Silent Killer
Here’s the hard truth: You interest rate is not the biggest issue with your car payment.
According to this car depreciation calculator, your $31,000 car is only worth about $10,000 by the time you pay it off.
Let me say that again, because the math is astounding!
You will pay just over $37,000 for a car that is only worth $10,000 by the time you are done paying it off.
You just lost $27,000.
Now consider doing this from the time you are 25 until you retire at 67. Every time you pay off the car, you go back and trade it in for a newer model.
You would repeat this cycle 7 times during your working career, and lose $189,000!
And consider if that $523 car payment was invested instead.
$523/month invested in low-fee index funds at 8% times 40 years = $2,062,186
I think it’s time to stop playing with new cars. They are KILLING your budget, your retirement, and your ability to live FINANCIALLY FREE!
It’s time to play a new game.
Let’s get rid of that car payment once and forever!
Do You Need To Sell The Car?
When someone emails me to ask for help, many times they are living paycheck to paycheck, and feel stuck in their current situation.
Then I ask for their income and debts listed out, and typically they are DROWNING in car payments.
I get it. Car payments have become the norm, and buying a reliable car seems unattainable without a loan.
But it can be done.
So the first step to paying off your car loan is a REAL, HONEST look at your finances, and whether you can afford to keep the car or not.
My rule of thumb is simple:
If you can pay of the car in 24 months or less, you can keep the car.
If not, you need to find a car you can afford, and cut the chains of the bondage to your soul-sucking car loan.
And before you say “I can pay it off, we’re good…”, consider that your car is going to drop in value by 10% per year for the first 5 years. That will be REAL MONEY LOST when you sell the car.
Is that something you’re willing to pay for?
If not, join TEAM FINANCIAL FREEDOM and say goodbye to your shiny depreciating asset, and hello to a new life!
Step 1: Find A Replacement (Used) Car
The first step will be to find a safe, reliable used car to get you from point A to point B.
I typically search on Craigslist, but you can use the car classified of your choice (AutoTrader seems popular as well). I recommend finding a Honda or Toyota that is about 10 years old and around 100k miles. The Honda Civic, Honda Accord, Toyota Corolla and Toyota Camry have IMPECCABLE track records for reliability and fuel efficiency.
Here’s how I typically setup my search parameters:
Cars & Trucks – By Owner. You want to buy from a person, because companies only exist to make a profit. If you are too nervous to buy private party, make sure the company is selling the car at a similar price as private party.
Minimum Price: $150. Some people list cars for $1 or some other dumb number. You don’t want to deal with those people, so I filter that junk out with this minimum.
Maximum Price: $5,500. Even though your budget is only $5,000, you don’t want to miss a great deal that’s just above your price range. You will be negotiating, so $5,500 helps show everything you can afford.
Model Year – Minimum: Select 15 years ago. Even though this may show cars older than 10 years, there may be some diamonds (one owner, very well maintained, low miles) and you don’t want to miss them because they are 11 or 12 years old instead of 10.
Check the “Has Image” box. Don’t buy from someone too lazy to upload a pic of their car.
In the Search Box: “Honda Civic.” Or “Toyota Camry”, or any other used Toyota or Honda that has a good reputation.
See below screenshot for an example:
There should be plenty to choose from within your budget and mileage. Just remember a few quick tips before buying.
- Bring a friend to look at car. If private party, make sure it’s during the day and in a public parking lot. Preferably a friend who knows about cars.
- When you find a car you think you want to buy, take it to a local mechanic for a “pre-purchase inspection.” This allows a professional to find ANYTHING wrong with the car, and gives you the ability to negotiate further, or walk away if it’s really bad. This is the BEST way to ensure you don’t get a lemon.
- NEVER buy something with a “Salvage” or “Rebuilt/Branded” title. Not worth the risk, trust me.
- Looks aren’t everything. Financial freedom is MUCH more important than a dent-free car.
Time to buy the car!
Once you have agreed on a price, make sure you meet at the bank for the transaction. I recommend cash or Cashier’s Check to pay for the vehicle.
Get A Small Loan If Needed. If you don’t have the cash to buy a $5,000 car right now, go to your local bank or credit union to secure a small auto loan or personal loan for this new vehicle. Getting more debt may seem backward, but in the long run, you will be coming out WAY ahead.
Step 2: Find the ACTUAL Value Of Your Current Car
Now that you have a plan to secure your safe, reliable replacement vehicle, it’s time to sell the current car and get rid of your loan forever!
First, you need to determine your car’s REAL value (what you can actually sell it for).
- Go to the Kelley Blue Book Website and input your car’s information.
- Ensure you select all the options to make sure the value is accurate.
- Select “Private Party” when looking for the actual value.
- This will give you a “range” that your call SHOULD sell for
Once you have the KBB private party value, next search for your car on AutoTrader.com and Craigslist.org.
- Search for cars for sale that are similar to yours (same year, similar mileage).
- Look in your local area to get a gauge of what people are listing their cars for.
- Pick a number just below the highest listed car that is the same as yours.
You now have multiple references for your car’s value. I recommend listing your car just below the highest Craigslist and Autotrader price, as long as it falls within the range you found on KBB.com. This will get you the most for your car, but make sure it sells quickly because you are NOT the highest priced car out there.
Step 3: The Only Pictures You NEED To Take
Now it’s time to wash and shine your beautiful pile of debt car. I recommend a mobile detailing service if you can’t find the time to clean it up. They come to your house and detail it IN YOUR DRIVEWAY! I did this for my previous car, and for less than $200 my car looked BRAND NEW!
Once the car is cleaned, it’s time to take simple, attractive photos. Here is the list of pics you NEED to take for a standout ad that sells quickly.
- Angle shots from all 4 corners. Make sure to get the whole car, but not much more. No need to a HUGE background, people want a detailed shot of the car, not the scenery.
- Direct shots from front, back, and each side. Keep the camera LOWER here so they can see the whole car.
- If selling a truck, top-down shot of truck bed. Buyers want to see how the bed looks, give them a full view.
- Close of up tire tread. People will email asking this inevitably, so take a close up shot of the tire tread so they know before coming to see the car and haggling you on price.
- Stay out of the shadows. Make sure your shots are in the evening when the sun is not DIRECTLY overhead, but also make sure there are no shadows covering your car. They trick the eyes and make the car look bad.
- Take a shot through each door directly. Open the doors and take a shot of the interior from each door. Buyers want to see each seat up close, and see how clean the interior looks.
- Dashboard showing mileage. You need to prove the mileage, to turn on the key and show the current mileage of your car. Please wipe the dust!
- Backseat shot from the front. Take a pic of the back seat while sitting in the front. Pull the camera back to show as much as possible.
- Front seat shot from the back. Hop into the back seat and shoot the front, again showing as much as possible.
Engine bay shots are NOT needed unless requested, or unless there is a unique feature to the engine. And please, don’t forget to blur out the license plate!
Step 4: Write The Perfect Ad (HINT: Keep it simple)
Now it’s time to list the car. You don’t need to be a car person to write your listing ad. You just need some basic information, and brief description of the car’s condition. Here’s what I recommend:
- Year, Make, Model, Mileage. This is required to list on my classified services.
- General Description. Make a quick bullet-pointed list of the cars details. Current condition (Like New, Good, Fair) Odometer reading, Car Options, and transmission (automatic or manual).
- List Any Issues. Honest is the best policy, list any known mechanical issues. But don’t write a novel here.
- Multiple Ways To Contact You. Email is the default, but you will want to talk to prospective buyers over the phone. Make sure potential buyers can get a hold of you either way.
That’s it! No need to create HUGE lists or write a big back story. Just the facts!
Step 5: Negotiate And Sell Quickly!
Once you’ve listed the car online, wait for the calls and emails to come through. When setting up a time to meet with a prospective buyer, follow these simple tips:
- Meet only during the day in a public parking lot.
- Bring a “Selling Buddy.” Always good to have a second person with you when showing the car to a stranger.
- Make sure you have a “rock bottom” price in mind, be willing to walk away if the buyer doesn’t offer above that.
- Once you land on an agreed price, ONLY ACCEPT CASH! You can also meet them at their bank for a cashier’s check DIRECT from the bank, but fair warning: cashier’s checks can still be cancelled within 2 days of issuing, so cash is still your bet.
Step 6: Pay Off The Car Loan
Congratulations! You have sold the car, now it’s time to take the proceeds and pay off the car loan IMMEDIATELY.
- First, meet the buyer at your bank to pay off the loan and have them release the title to the buyer.
- If the lender is your bank, you can simply deposit the cash and transfer the money over to pay off the loan, which allows them to release the title to the buyer.
- If the lender is NOT your bank, you may want to have the buyer simply write them a check for the payoff amount directly to the lender. Which means if you have some equity, you can have the buyer write a check to pay off the car, and then one to you for the remainder of the balance.
- Some buyers will be wary of this transaction, so make sure you talk to them about this AHEAD OF TIME to avoid any surprises.
What If I Owe More Than I Sold The Car For?
Many times, if you are selling a newer car, the value has dropped faster than what you owe on the loan. In this case, you have “negative equity”, and will be responsible for the remaining balance on the loan before you can complete the transaction.
First, I recommend contacting the lender to see if you can sell the car and pay off the balance at a later date. If this is not possible, you will need to come up with the difference between your selling price, and what you owe.
Ask the lender for the “payoff amount”, and then subtract your selling price to find what you will owe.
Payoff Amount = $26,000
Selling Price = $23,000
WHAT YOU OWE = $3,000
In this example, you will need to bring a $3,000 check to the lender at the time of sale so they can officially release the title to the buyer.
If you do not have the funds, I recommend borrowing the difference with a personal loan from your local bank or credit union. You can borrow this amount at the same time you borrow for the replacement vehicle back in Step 1.
Again, this may feel backwards, but owing $3,000 on a personal loan is MUCH better than $23,000 on a car that is dropping in value like a rock!
Don’t Ever Get A Car Loan Again
If you have followed this exercise and are able to get yourself out of your car loan, you have taken a MASSIVE STEP toward Financial Freedom. You have cut the anchor of a “car payments forever” lifestyle, and are well on your way to building the financial life you’ve always wanted.
But you need to COMMIT to NEVER borrowing money for a vehicle ever again.
That means you make a plan for your money that includes a “car maintenance fund”, or a “car replacement fund.” You only buy good quality used vehicles that you can afford. And you put your money toward things that are WAY more fun than driving around a shiny pile of debt.
If you haven’t already, sign up for newsletter and get access to my Free Budget Template, commit to enjoying your money AND keeping more of it too!
It’s time to play a new game where you WIN. It’s time to live financially FREE!