Do you have a car loan? Congratulations! According to The Motley Fool, you and about 107 MILLION of your closest American friends are currently paying for a car on the installment plan. Unless you are fortunate enough to live in an area with a good public transit system, you need a car to get around. Kelly Blue Book reports the average new car cost in 2018 was $35,000! Read on for some ideas for paying off your car loan or breaking a car lease.
Paying Off your Car Loan Faster
While most of the debt I had to pay off was a home equity line, I also had a couple of car loans that were close to being finished when I started my debt snowball. There were no prepayment penalties for these loans so I put them on a list smallest to largest balance and paid them off. Lending Tree has some other great strategies for paying off your car loans quicker so you can save yourself a little bit (or a LOT) of money.
Car loans can be structured so that the interest is front loaded, so be sure the extra payments you are making are actually applied to the loan principle. You can learn more about front loaded loans here.
Upside Down Car Loans
“WE’LL PAY OFF YOUR TRADE NO MATTER HOW MUCH YOU OWE!!!” Holy COW, those car dealer ads drive me crazy. They’re not paying off ANYTHING so please don’t be fooled into thinking otherwise! They are simply rolling the amount owed on your current car into the loan for your new car. That is a complete and total recipe for disaster, especially if you’re in an accident, the car is totaled, and you don’t have gap insurance.
The average depreciation rate for vehicles is around 20% in the first year alone and another 10% annually according to CarFax. If you’ve financed a car for longer than 3 years, you’ll be carrying a good bit of negative equity for far longer than you should. Getting out of a car loan if you’re upside down is not an easy process but it can be done. Credit Karma has some good strategies for getting out of an upside down car loan.
Best to Pay Cash
It IS possible to buy a good, reliable car for cash, as reported by Clark.com. Just make sure you have the vehicle inspected by a reputable mechanic and run a check on the title. CarFax offers a great service for a fee, but you can also run a VIN check on a car for free.
Some consumers have worked their way around the high cost of a new vehicle by leasing instead of purchasing. US News has some good information explaining how car leases work. Essentially you’re paying the leasing company for the depreciation cost of the vehicle. Your payment is lower than it is for a new car purchase, but you never own the car.
I have to admit I’m not a fan of car leases. I know there are some people out there who need to have the latest and greatest and they don’t mind paying for it, but I’m not one of those people. Hubs and I leased a truck once and I’m fairly certain we’ll never do it again. It’s just not worth the money or the trouble, especially if you go over the mileage. If you have leased a vehicle and are now having a little bit of “buyers (leasers?) remorse”, you’re not completely stuck. I found a great article at The Balance that lists some sound strategies for breaking a car lease without costing yourself a ton of money in the process.
Have you found any other strategies for dealing with vehicle debt? Please share your experience in the comments. Thanks!
Be well and God Bless-until we meet again…
Note-Any and all items contained in the Older Wiser Money Miser Debt Free Challenge are intended as a resource for informational purposes only and should not be construed as professional tax or investing advice.