3 Simple Ways to Not Have a Car Payment

February 9, 2021

How to avoid taking out a car loan. 

A gray sport car driving into the sunset on an empty freeway

If you think nobody cares if you’re alive, try missing a couple of car payments. 

You’ve probably heard that before right? Or, probably said it yourself. Most of us rely on a car as our main transport system to get around, go to doctor’s appointments, run errands, go to work, etc. It’s normal to be broke when it comes to money. So, how do you be different just like other weird people who don’t have car payments? How exactly do you get by without a car payment?

Before we answer those questions, let’s begin by talking about how car payments work.

How do car payments work?

Having a car payment literally means you are driving a car that is not even yours! The bank or financial institution owns the car while you are making payment. When you take out a car loan, you promise to pay back the amount they loaned you (plus interest) within the time frame. 

So when it comes to calculating your car payment, these companies consider the price of that new ‘dream’ car you want, your financial history, any trade-in or down payment you have, the interest rate on the loan, and the number of months it will take you to pay off the loan.

How much is the average car payment?

According to Experian’s Q4 2018 State of the Automotive Finance Market report, the average car payment for a new car is a whopping $545 and interest rates are rising across the entire auto industry with the average interest rate landing at 6.13%. The average length for the loan is between five- to six-years. 

So what’s happening behind the scene? Well, the car dealer will NOT tell you that your new car will lose 60% of its value within the first five years!

What does that mean? After six years, you’ve paid almost $39,000 for a $26,000 car, which is now worth maybe $5,000. That’s not a good deal. Not to mention, you are upside down on your car loan when you owe more on the loan than your car is currently worth. 

How can you get a car without a car payment?

With a little bit of discipline and a mission to save efficiently, you can get your next car without a car payment!

How to know what can you afford? Well, if you can’t write a check or pay for a car with cash on the spot, you can’t afford it. So, how are you ever supposed to buy a car? It’s all about managing your expectation and changing your mindset.

1. Buy a cheap used car.

What if you bought a cheap used car for $2000 to get around for 10 months? Then, save the money – $545 monthly car payment – that was supposed to be paid to the bank/lender. 

2. Save what you would’ve spent on your car payment.

After 10 months of doing that, you’ll have $5,300 to use to buy a better car. Sell your used car and add another $1,500–2,000, and continue building your saving. That’s huge leverage to upgrade your car in just 10 months—without paying any interest to the bank!

3. Sell the cheap used car and buy the car you want with cash!

Rinse and repeat. If you keep consistently putting the same amount of money away, 10 months later you would have another $5,300 to put toward a car. Because used cars depreciate at a slower rate than the new ones, you could probably sell your current $6,000 vehicle for about the same price you paid for it10 months ago. Now you have doubled the amount to upgrade your car—just 20 months since you first started. 

Imagine what you could do with that $545 if you weren’t paying it to the bank every month.