4 Steps to Break the Cycle of Car Debt

Most people probably don´t realize it, but car debt is one of the main things that is keeping us from being wealthy. As a matter of fact, a $400 monthly car payment could become $467,000 if it was invested for 30 years and earned a 7% rate of return!

Unfortunately, car payments are considered normal in middle class society. In any parking lot full of newer cars, we would be hard pressed to find a car that doesn´t have a payment on it. Because of this, most of us are missing out on hundreds of thousands of dollars of investment gains.

Many of us may even want to get out of car debt, but it can be so tough to get out of once we get into it. We may even completely pay off our car, but then find that we want to get a newer model because our car broke down or we got a raise at work and just want to get a nicer car. Since most people don´t have $30,000 saved up to purchase a new car, we may feel forced to go into debt on our second car.

With our second new car, the cycle of car debt continues! As we continue to finance cars, it become easier and easier to get into car debt. Car debt becomes normal, not only for society, but for us as we continue to finance newer cars.

However, I want to challenge this assumption that car debt should be considered normal. After all, we are talking about potentially trading our car payment for almost half of a million dollars! I would not want to give up on that much in investments just to drive a newer car.

Letś see how we can break the cycle of car debt just by following a few steps.

Step 1: Finish paying off your current car loan

No matter how much time we have left on your car loan, we have to pay it off to break the cycle of car debt. Fortunately, this step is actually pretty easy because you are already doing it!

If we are paying $400 per month on our car loan, then we should continue to pay at least $400 per month. We may want to pay more than this, but at least pay this minimum amount.

Step 2: Keep your car and continue paying a car loan (to yourself)

This step is going to be a lot more difficult than the first step. If we just paid off a car that had a $400 per month car payment, then we may feel like we suddenly have a lot of extra money.

After all, we have an extra $400 per month!

We may even feel like we deserve something new since we were able to get out of car debt. Perhaps we can go on a nice vacation or buy some new furniture for our house. Or maybe we just feel like our car is getting a bit too old. After all, we have probably been driving this car for 5-7 years by now and we may just want to get a newer car.

But this is where we have to remain focused and disciplined. Instead of going out and buying something new, we should save our extra money for our next car!

Think about how powerful this step is. If we just save our $400 per month car payment, then we would have $4,800 after only 1 year!

My last two cars cost me $4,500 and $5,000 and I drove each of them for around 100,000 miles. Not having a nicer car doesn´t make me feel frustrated or envious. Instead, it actually makes me feel pretty happy to know that I am able to save so much money!

Step 3: Buy a used car with cash

It may still seem hard to realize that we can buy a car without having to finance it. However, keep in mind that we now have around $4,800 just from saving our car payment for one year. If we want a car that costs more than $4,800, we just need to keep saving for another year or two. In no time at all, we will have enough money for a $10,000 or $15,000 car.

When we go to purchase the car, we may be able to get a deal on it by using Craigslist or buying from an individual owner. I know that this has saved me thousands of dollars on each of my car purchases.

However, even if we go to a used car lot or dealer, buying a used car with cash will save so much money on the purchase. Since we are offering cash, we will usually be able to get the car for less after negotiations. We will also be able to avoid buying a stupid new car. Instead, someone else will take the huge loss in depreciation while we save thousands of dollars!

Step 4: Save up for the next car

By now, it´s probably pretty easy to keep paying the car loan to ourselves. Therefore, we should keep doing it until we save enough money for our next car. Perhaps this is only $5,000 or maybe it is $15,000. Either way, it is important to save enough money so that we are not tempted to go into debt on our next car.

As we know, cars break down, wear out, and eventually need to be replaced. If we have not saved for their replacement, then it will feel like we need to go into car debt. We may even spend more money than we need to. But if we always have enough money saved for our next car, then we will never feel forced to take out a car loan!

A quick caveat for car leases

Even worse than owing money on a car that we own is owing money on a car that is leased. Leases always sound cool and cheap when they are advertised on TV, but they are actually one of the worst types of car debt to have.

However, I understand that many people may find themselves in a lease and may feel stuck. Many people may feel so stuck that they are contemplating getting another lease or may have even had a string of multiple leases.

Honestly, many people just feel trapped in their car lease!

The good thing is that everyone can get out of the trap of car leases! To do this, we just need to follow one of these two options:

OPTION 1: If you have a little bit of money saved ($5,000 or so), use this money to buy your next car once your lease runs out. Then keep paying your lease payment. However, instead of paying it to a car company, pay it into a ¨used car fund.¨ This way, you will always have money saved up when you want or need to purchase a car.

OPTION 2: If you don´t have much money saved, then you have to get real aggressive with your saving. This may get a little bit difficult if your budget is already tight, but it is absolutely imperative not to lease another car again.

If you have a year or more left on your lease, then try to save $250 or so per month. This will allow you to purchase a reliable car that costs $3,000 or more.

However, if you only have a few months left on your lease, then you must do everything possible to save up a little bit of money. Again, if you can save $3,000-$5,000, you can find many nice, reliable, and safe cars to purchase. Even if you have to borrow a couple of dollars from a bank or a credit union, you cannot lease a car again!

Hopefully, this article has helped you to realize that it is possible to break the cycle of car debt and car leases. Just follow the four steps outlined above and you will never have debt on your car again! Let us know how you are able to avoid car debt by checking out the comments.

And thanks for reading!

~Nathan

Let’s keep living a great life … with the help of money. So what’s next?

• You can travel for free by using rewards credit cards.
• You can get motivated and get out of debt.
• You can check out the next post or the previous post and continue to learn.

But no matter what you decide to do, let’s leave the ordinary behind and take action today!