Tag Archives: Auto Loans

Why I Paid Down My Auto Loan on a Used Car as Fast as Possible

Cars are a necessary expense for most Americans.

Unless you are lucky enough to live near a good public transportation system or in a major urban area, you will likely need a vehicle to accomplish tasks of daily living, such as getting to work, buying groceries, or going out to dinner. Buying a car can be expensive, and having a car loan can be a pretty steep financial burden, particularly on top of student loans, a mortgage or rent and other obligations.

That is why it makes sense to buy a used car whenever possible — and to pay off your car loan as soon as you can.

My Story

For me, buying a used car just made good financial sense. As a father of three young kids who is still working on paying off my student loans while saving for their college, I don’t have a lot of extra cash to put towards the latest and greatest vehicle. And while having a new car can be great, it’s no secret that a car is a terrible investment, as a new car starts to lose value the minute you drive it off the lot.

So when it was time for me to purchase a vehicle, I looked for a solid used car that was safe, reliable and a good deal. Then I got to work paying off my car loan as quickly as possible.

Why I Chose to Pay Off My Auto Loan Faster Than Required

Many people accept car payments as a fact of life. For me, not having a car payment represents financial freedom. Car loans can often have high interest rates, particularly if you arrange financing through the dealership. Loan rates may be as high as eight or ten percent.

Car loans may also be sold by a lender to a different bank, and if it has a variable interest rate, it may become more expensive over time as rates change. For these reasons, it makes a lot of sense to pay off your car loan as quickly as fast as you can — and avoid car payments entirely.

Saving Money

Of course, there are other benefits to paying off the debt on your car. When you pay off your car loans ahead of schedule, you will save significant money on interest. Interest on your loan — even if it is at a relatively low rate — can add thousands of dollars onto the total amount of your loan.

By adding even a small amount of money each month onto your car payment, such as $50 or $100, you can shorten your loan term considerable and pay hundreds or even thousands of dollars less on your car loan. A number of online calculators are available to help you determine how much you can save by paying off your loan early.

Freeing Up Money to Use Elsewhere

The money you save by paying off your car can then be used to start saving for your next car. Unfortunately, unlike a house or a college education, a car will not last for a lifetime. By buying a less expensive car and paying off your loan early, you can set aside money for a down payment on your next vehicle. That will help you get ahead of the game for your next car purchase — and perhaps even avoid the need for a loan at all.

Reduce Insurance Costs

Paying off your loan may also reduce your car insurance costs. When you have a car loan, the lender will require a certain level of coverage. Once you have paid off your loan, you can reevaluate your coverage. You may not want to dip below a certain level of coverage, but you might be able to save some money by lowering the amount of collision or comprehensive coverage for your policy.

Boost Your Credit Score

Finally, paying off your car loan will boost your credit score. Without a car loan on your credit report, your debt to income ratio will improve (in other words, you will have less debt in relation to your income). This will make it easier for you to be approved for major purchases and to get lower interest rates on mortgages or refinancing your student loans — which can save you even more money and help you reduce your overall debt.

Closing Thoughts

While it may be more fun to drive a flashy new car or to always have the latest car, it makes good financial sense to pay off an auto loan on a used car instead. By making that choice for myself, I am helping my family reach our financial goals — and achieving more security for our future.

Josh runs a parenting, faith, and personal finance blog over at Family Faith Finance. As the father of 3 children, he is always looking for ways to save a few extra bucks for his family.

I Bought a Lemon

 

The first time I took on debt was the spring when I graduated from high school.  When I was a senior in high school, I was not 100% sure what I wanted to do with my life.  I knew that I would ultimately attend college, but I was not mature enough yet at the age of 18.

After talking about it with my parents, we decided that I was going to work for a year or two before I went to school.  They were not thrilled with the plan, but also did not want me to just go to college without a solid direction.  Looking back, I still think that was a good idea.

Since I was going to get a job, I needed a means of transportation.  I grew up in a part of Pennsylvania were public transportation was limited.  To get to work, I needed a car.

It was 1995, so all the online car buying resources were not available.  At that point, there was Consumer Reports and Edmunds.  As you will find out, I did not read those magazines.

I decided that I wanted a Jeep Wrangler.  I started shopping by looking in the classified ads in the newspaper.  After looking for about one week, I spotted a 1991 Jeep Wrangler with a hard top.  My dad and I took a ride down to this local used car lot to test drive it.

The Jeep was nice, but when we were at the lot, a different car caught my eye.  The other car was a 1986 Audi 5000 CS Turbo.  The salesman called it a 4-dood Porsche.  We test drove the car and we really liked it.  It was a solid driving car.

At the time, I had zero credit.  My dad agreed to co-sign for the loan.  He had one condition, he said if I missed a payment, he would sell the car.  I agreed to his terms and bought the car.

The car had less than 60K miles and only cost $6,500.  The loan payments were around $165 per month.  Because that it was a turbo, the insurance was higher than the car payment.

 

I had the car for about 2 months before the trouble began.  There were many issues, but the major issue was that if I was not driving with my foot on the throttle it would stall and not start back up.  When I was at a red light, I had to slip the car into neutral, put my left foot on the brake, and keep my right foot on the gas pedal.  Yes, very dangerous.

I took the car to a few different local mechanics and they did not know how to fix it.  I took it to a mechanic that specialized in European auto repairs.  He was not able to pin point the issue.

After I owned the car for about 4 months, I had to sell it.  My Mother was driving it on a major interstate highway when it stalled and would not start back up.  She was lucky to not have been injured or even killed.  The state police came and they called a flatbed to tow it away.  The car was simply not safe and had to be sold.

I took it to a dealer to find out what it was worth on a trade-in.  The dealer offered me $2,500.  I owed over $6000.  I did not want to lose $3,500.  At that time, $3,500 was a fortune because I was broke.

On my way home from the dealer, the car stalled at a major intersection.  I tried to start it for 15 minutes, but it would not restart.  This time the state police were not needed, but a flatbed was.

The car had to go.  I spoke to the owner of the car lot who offered me $2,500.  We worked out a trade for a 1986 Honda Accord with a bent frame and 115,000 miles.  The salesman told me to be careful with the car because it had a bent frame that causes it to drift to the right.

This whole situation truly had me upset.  I was not upset about losing the Audi.  What had me worried was the amount of Debt that I now had.  Plus, I felt that I had very little to show for it.

For the next four years, I had to make monthly payments on a $6,500 loan, but drive a $2,500 car.  This experience left a bad taste in my mouth when it came to debt.  I never missed a payment and paid the loan off.  I told myself that I would never get another car loan again.

The Honda lasted about 8 years.  My next few cars were hand-me-downs with well over 100K miles on them.  I received one from my parents and one from my wife.

I did not buy another car until I was 35 years old.  This time I did my due diligence and did some research before making the purchase.  That car was certified used Subaru with a 100K mile warranty.  I also paid cash.

Have you ever had a negative experience with debt?  If you have, please share your experience and what you learned from it.