After home mortgages, car loans are the largest debts most people carry. And most people have them. More than 70 percent of all the cars purchased in this country are bought with borrowed money. And many auto sellers discourage paying by cash because of the potential loss in revenue if you were to finance through their finance companies. So beware.
Let me be blunt. Car debt is one of the biggest roadblocks for most people on their journey to true financial freedom. It is especially dangerous because most people never get out of it. Just when they get to the point of paying off a car, dazzled by the thoughts of a newer model, they trade it in and purchase that newer one with credit.
Unlike a home, which can appreciate in value, the moment you drive a car off the lot it depreciates, or decreases in value. It’s worth less than you paid for it by the time you hit the first intersection. You’ve probably heard the expression, “upside down on a car loan.” The meaning is simple: You owe more for the car than it is worth. If you had to sell it, you couldn’t get enough to pay off the loan.
Escaping the Auto Debt Trap
There are three steps to get out of auto debt.
- Decide to keep your car at least three years longer than your car loan.
- Pay off your car loan and after your last payment, keep making the payment, but pay it to yourself. Put it into an account that you’ll use to buy your next car.
- Buy your next car with cash. When you’re ready to replace your car, the saved cash plus the trade-in value should be sufficient to buy a car without credit. It may not be a new car, but you should be able to buy a low-mileage used car without any debt.