Just Because You Can Afford a Monthly Car Payment, Doesn’t Mean You Should Finance a Car
“Car payments for life, bro,” my friend told me.
“Yeah, but that’s a lot of money to spend monthly,” I replied.
Unfortunately, my financially-challenged friend isn’t the only person with this mindset. As of 2022, around 31% of American adults said they make monthly car payments, and 14% said they plan to get an auto loan within the first half of 2023. But I’m here to say that just because you can afford a car payment doesn’t mean you should have one. Here’s a closer look at car payments and why you can live without them.
The average car payment amount is pretty high
The average car payment amount in the U.S. is relatively high, at $575 monthly for a new car and $430 for a used car. The interest rates aren’t too much better. Ramsey Solutions notes that the current average rate for a new car is 4.09% and 8.66% for a used car. And these numbers are only getting higher.
However, many Americans can probably read those numbers and think they’re not bad. In that case, it’s worth exploring the real cost of a car payment.
The real cost of monthly payments and interest
To break down how much car payments can really cost you, here is an example from Ramsey Solutions:
If you purchase a car for $30,000 with an average interest rate of 4.09% for 60 months, your monthly payment will be $554 per month. Additionally, at the end of the loan term, the total amount of interest will be $3,223 more than the original cost of the car – bringing it to $33,223.
That may not sound like a lot of money to add to some Americans, but consider that the car will depreciate over time. According to data from Experian, the average amount of depreciation for a car over a five-year period is 30-67%, depending on the make and model.
That means by the time you’re done paying off that $33,223; it will be worth around $19,000 – based on a 40% depreciation rate. Would you want to pay over $33,000 for a car that’s worth $19,000? Probably not.
Buying a car with cash is king
You have heard the term “cash is king” when it comes to buying cars. The saying mostly pertains to the buyer having leverage over the seller due to having cash. But in this instance, buying a car in cash is king because you have to deal with the interest charges on a loan. If you think that saving up $30,000 in cash is tough, here are a couple of tips:
- Buy a cheaper used car: There’s no shame in driving around a $10,000 car for a few years. If you can’t afford a fancy new car, buy a cheaper used one in the interim in cash.
- Save the monthly payment amount: If you plan to take out a loan for $554 a month, save that amount every month instead (if you have a car to get around in now). After 10 months, you’ll have $5,540 saved up. Keep doing that until you have enough money for the new car.
Although having a new car to show off to your friends is nice, it’s not necessary. And while many Americans are comfortable with making monthly payments on an auto loan, that’s a lot of money to spend over time – especially since the car is losing value. In conclusion, just because you can afford the monthly payment on a new car doesn’t mean you need to buy one.
If anything, buy a used one in cash and work your way up to a better one in the future. By doing so, you’ll be able to save a lot of money over a five-year period and be better off financially in the future.