A vehicle is one of the most expensive things you will ever buy and most of us need, or at least believe we need, a car. If you live in an area that doesn’t have an easily accessible public transportation system, you probably need one.

Owning a car is expensive. You have to pay for gas, oil changes, tires, other maintenance, insurance, tags, and depending on where you live, maybe inspections and personal property taxes. If you’re making a car payment, this expense takes up a big chunk of your regular income.

There are quite a few ways you can save money on transportation. If you haven’t read it, go back and check out the post on transportation. But what if you didn’t have a car payment? How much money would you be saving?

What you’re really spending

If you have a car payment, you are paying more than just the purchase price of the car. You are paying interest. You probably don’t pay much attention to how much interest is costing you. You just make the payments.

But let’s use an example. Let’s say you have decent credit and you buy a car for $8,000 at an interest rate of 5.9%. Your monthly payment is set at $250 and it will take you 3 years to pay for it. By the time you pay off your car, you will have paid not only the original $8,000, but also $929.88 in interest. If the purchase price of your car is higher, and/or your credit is not so great, it will be a lot more.

Price	Interest Rate	Payments	Total Paid
$8,000	5.9%	$250	$8,929.88

Also, keep in mind that if you have an auto loan, you are likely going to be required to carry full coverage insurance regardless of how old the car is. Technically, you don’t own the car until it’s paid off. The bank does. And they can enforce the insurance requirements, as well as take the car if you end up not being able to make the payments.

Make payments to yourself

If you were to save that $250 each month for 3 years, and keep the money in a high yield savings account that earns an annual interest rate of 4.5%, you would have a total of $9,603.64. In the same amount of time it would take you to pay of the $8,000 car, you could have over $1,600 more in your pocket, buy a nicer car, and not have a car payment or the requirements that come with it.

Monthly Savings	Interest Rate	Interest earned	Total savings
$250	4.5%	$1,603.64	$9,603.64

Notice how the interest rate is higher in the car payment than the interest rate on the savings method? And it still equals more? This is due to the compound interest working in your favor. I’ll explain more about how compound interest works in another post. For now, let’s just pay attention to the numbers. Which seems like the better option?

Work your way up

If you don’t have 3 years to save for a car because you need one now, there’s another option to consider. It’s not that hard to save up $1,000 or even $2,000 if you put your mind to it. If you’re willing to drive a clunker for a little while, you could do this:

• Buy whatever cheap car you can get for now.
• Drive it for a year and save the $250 you would have been spending on a car payment.
• Trade in the clunker and the $3,000 (plus interest) you saved for a little nicer of a car.
• Repeat the process.

If you do this for a few years, you’ll drive a nicer car each year, and you’ll be the one benefiting from the interest, not the bank. Before you know it, you’ll have the $8,000 car or better without ever having to deal with a loan.

Pay it off faster

If you already have a car payment, concentrate on making extra payments towards the principle until it’s paid off. This will save you money in interest as well. Rates are charged based on the current balance so if you are constantly lowering it, the amount of interest will go down.

Once you have your car paid off, pay yourself what you were paying towards the loan by saving the money for the next car. Either way, you’re making a car payment. But if you’re paying yourself, you are the one benefiting from the interest and no one is going to tell you your credit isn’t good enough to get what you want.

Perspective

There is freedom in avoiding debt. If that means you have to spend a little while driving a car that isn’t as nice as the one you made payments on, so be it. In the end, who cares?

A car is not a representation of who you are. It’s not a status symbol. It’s a chunk of metal, (these days probably plastic), that is intended to get you from A to B.

There are so many better things you could be doing with your money than making interest payments on a car that will eventually be replaced. Move your focus to more important goals, like freedom from debt, the ability to make your own choices, and what you want your future to look like.