How to Pay Cash for Your Next Car

Americans love cars. If we don’t love them big, with wide tires and running boards, we take them sleek, sexy and low-slung, or trim and safe enough to boast a “Baby on Board” window sticker. Or we love them bio-friendly and are willing to spend a fortune in order to cut our fuel costs or get a government tax credit. The problem is that most of us have gotten used to carrying loan payments of $300, $400, $500 or more each month. Here's how you can pay off your current car loan, squirrel money away so that you earn interest rather than pay it, and pay cash for your next car.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• A little discipline
• A desire to stop squandering money
• A savings or money market account

1. Don't think of cars as toys. They are transportation. Yes, we want them to be attractive and reliable. But they’re not toys, and if we can afford to throw money away on endless car payments, we still could find a better long-term use for that $300 or $500 or even $700 check we write each month.
2. Cars these days can go 200,000 miles Don't think that you need to buy a new car every two years. Today’s cars are designed to go 200,000 miles with little trouble. Car manufacturers have mastered the workings of the internal combustion engine and all the computerized gizmos that go into them. Where 40 years ago or so, we needed a tool box in the trunk and at least a basic working knowledge of the vehicles we drove, today’s cars are built so all we have to do is turn the key, hit the gas and go, changing the oil regularly, and that’s about it.
3. Don't think that leasing is a financially smart idea. It’s a good deal for everyone but you. The dealer gets to sell you a car and then get it back in three years. Saying leasing is smart is like saying that you’d be better off renting a home versus buying it. (If you think that, well, you won't be reading this article anyhow.) The only exception: If you’re a business owner and want to deduct 100 percent of your vehicle’s cost. Even then, work out the numbers before you sign a lease.
4. Plan to buy your next car outright, drive it for 10 years (an arbitrary number, but good enough for most purposes) and then pay cash for your next vehicle.
5. Start by picking your car wisely. You want quality, style, reliability and yes, something that makes your soul soar. But buy it for the long-term. Plan to own it for 10 to 12 years.
6. Go window shopping, getting to know a few salespeople at dealerships and test driving several cars. However, do not commit at this point. Just look, touch, drive and research.
7. Shop around and negotiate the best price. The auto industry is super competitive these days. As a rule of thumb, go to at least three dealerships before making your final decision.
8. Look for the best financing deal. But be skeptical about those “$2,000 off or 1.4 percent” financing deals. Such either-or deals put no money back in your pocket in the long run. Ask for both. Unless the deal is terrific, consider using a home equity line of credit. The rate is usually competitive, and the interest is tax deductible. Just remember that when you use your home equity, you are also placing your home as the collateral for your car.
9. Go for the shortest financing term you can afford. Follow this rule of thumb: Four years. That is generally short enough so that you can save on interest payments, but not so short that your monthly payments are overwhelming.
10. Here's the key, the best step: Keep making car payments after the car is paid off. Depending on how many miles you drive it each year, it may have between six and eight good years left in it. For the sake of discussion, let’s say six years. Let’s also say you have been paying $500 each month. So, what do you do with that $500 you were paying to the bank, credit union or car finance people? Every month, keep making that $500 payment, but this time to yourself.
11. Open up an account and either write a check every month or have automatic transfers made into your “new car” account. After six years, you will have a 10-year-old car for a trade-in, to keep for your kids or just to keep on driving. Plus, you will have $36,000 saved. Plus, if you earn 4 percent on average on your money, you will have more than $41,200 for your next vehicle.

Tips & Warnings

• When researching the right car to buy, get out the buyer’s guides. If you plan to do only limited research, use the Consumer’s Report car ratings guide. Also consider insurance costs (some cars are discounted for safety; others receive add-on surcharges), as well as the possible impact on your personal property taxes in your state.
• Does your auto insurer give a safety discount? Or maybe you will be penalized for driving that super-fast blue-streak sports car. Before you buy your next car, find out how it is ranked for safety by The Insurance Institute for Highway Safety.
• You may be in line for a break on your auto insurance when you turn 50 or 55. Insurers know that this is the safest group, with the best safety record. Talk to your insurer. Caution: Rates go up again when you hit 70.
• If you use your home equity to finance this car, you are also placing your home as the collateral for your car.