Oh just buy your car already.

So, I realize a lot of people buy their cars with cash. And yet it seems like a lot of people finance cars. Many, if not most, of the people who call into the Suze Orman Show have car loans among other things.

I could never figure out which young people buy cars with cash. It seems like a cycle: you are going off to college, or just got your first job, or just got into a suburban graduate school (in my case). And suddenly you need a car you didn’t need yesterday. And you probably have insufficient cash in one of these situations. Usually, if you need to start getting to your new job tomorrow, there isn’t time to collect a few paychecks to get a used car. So you get a new car and finance it, right??

That is what I always figured. I don’t think it clearly occurred to me at first that you can also finance a cheaper used car. I thought buying used cars even from a lot was like Craigslist, and you were supposed to show up with $4000 cash.  Then again, I didn’t realize you could use a credit card at McDonald’s until I was 23. I don’t know where this stuff comes from.

So where was I… Seems like people are often hurtled into a car-financing cycle. I was actually given my first car from my sweet and generous mom. Then I traded it in finally and financed a new car with almost nothing down. Then I paid the considerable remaining balance 5 months ago and own it outright now. What a relief!  I will never finance a car again.  Cycle broken.

I understand that people don’t have the means and finance sometimes.  But car payments take a huge bite out of the finances of the people who didn’t have the means in the first place!  While car loans are relatively small ($0-$20k say) and low interest rate (0-5% say) compared to other loans (student loans, mortgages), their relatively much shorter repayment schedules lead to huge monthly payments. Huge payments that impede your ability to get anything else done.

My car payment was bigger than my largest student loan monthly payment, and was half the size of all of the undergrad and graduate student loan payments put together.  That is why I had to zap it.  If you’ve had a lingering car loan balance and think you could zap it with some liquid savings or dedicated extra payments, paying it down would free up substantial monthly funds that could be put toward, in order of ascending desirability, credit card balances, student loans, other debt, emergency fund, Roth IRA, investments, etc. Ironically, spending your time putting money there gives you funds for the next time you need (or let’s face it, want) to buy a car.

What I do not understand is hearing about people who have some savings, but also have $5k left on a car loan that they are ready to spend the next 14 months paying off.  Even when the loan payments hinder the ability to save more money.  May as well pay off the loan and use that accomplishment to fuel saving more in double-time.  It’s the inertia that gets me.

From my experience,there’s almost any better place for such a significant chunk of monthly change than going into a car loan. For the past 5 months, the freed up funds have turbo-charged my student loan payoff.  Plus, getting the title in the mail is freaking sweet.

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