No More Car Loan: 7 Steps to Stop the Cycle of Car Payments

Car payments are a way of life for some people.  A constant spend of several hundred dollars is added into the budget every month.  It’s a vicious cycle: you buy a new car, as soon as you drive off the lot it depreciates 20% or more, and you make payments (and pay interest) for 36, 48, or 60 months.  At the end of the loan you decide to buy a new car, trade in your current vehicle at significant loss, and hop back onto the bandwagon of car payments.

How to Avoid Constantly Making Car Payments

This cycle of auto loans will cost you thousands of dollars over your life time — I was in the same situation with a loan until recently.  If you currently own your car without any financing or other lien on it, congratulations.  Your goal is to keep this situation moving forward.  Don’t take a step back and end up in debt again.

To avoid getting a car loan in the future, do the following:

  1. Drive your current car until the wheels fall off.  If the car doesn’t need replacement, don’t replace it unless you are financially ready.
  2. Estimate when you need a new car.  If your car is 10 years old, you need to start preparing for a replacement soon.  If the car is 5 years old, you have a little bit more time to prepare.  Estimate what year you will need to purchase a new vehicle.
  3. Estimate how much a new vehicle will cost at that time.  Are you going to buy new?  Used?  Look at cars available today for your target vehicle to get a cost estimate.  Even if you are off by a thousand dollars, you will be better prepared.
  4. Calculate monthly “payment” to yourself.  Simply calculate a monthly payment based on the price of the vehicle and when you think you’ll need all the money.  Put this “payment” into a special interest-bearing account earmarked for your next car.  For example if you plan to buy a $12,000 vehicle in two years, you have 24 months to make payments.  That comes out to $500 per month in savings.
  5. Repair your car until you’ve saved enough.  If something happens to your car and your savings isn’t adequate enough to buy a new one, consider repairing your old car instead of taking out a car loan for a new vehicle.
  6. Buy a new vehicle.  When you’ve saved up enough money and find a car that fits into your budget, you can choose to buy it.  Or, better yet, keep the money and continue to drive yours until the wheels fall off, then buy a new vehicle.
  7. Continue making “payments” to yourself.  Just because you purchased a new car doesn’t mean you should stop planning for the future.  Plan out when your next car purchase will be and start saving up again — even if that next goal is 10 years away.

What if You Own a Car With a Loan?

Things are more complicated if you are currently owe money on your vehicle and making loan payments because you might not have enough extra money to save up for your next car.  The best recommendation is to take care of your current car and pay down your debt as fast as you can.  Once you are done with the loan, continue to make the payment to yourself into a savings account (see #4 above).  Finally, do the best you can not to buy another car until you have saved up enough money to buy one outright.

Last but not least, you can make this strategy work better by buying a used car instead of a new one.  You can buy an excellent used car at a significant savings off a brand new car.  This will make it that much easier to buy the car with cash instead of having to take out another car loan.

Pinyo is the owner of Moolanomy Personal Finance and has written for many online publications, including American Express Currency and U.S. News Money.  You can follow him on Facebook and Twitter.

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  1. Jean on October 3, 2011 at 6:47 am

    Our first car was already ten years old when we bought it back in 1993 but it held on somehow till 1998 when we finally were able to afford a new car. That one lasted a good 13 years till 2010 until it started to develop problems that were getting too expensive to fix. We chose to repair and sell it while we still could and get another new car.

    Always make sure you take good care of the cars and maintain it regularly. Pay attention to early symptoms of problems and repair them immediately. Inspect the work done during routine check-ups and try to hire a trusty regular mechanic.


    • Echo on October 3, 2011 at 10:41 am

      @Jean – Preventative maintenance is so important. Don’t wait for a problem to develop, or it will cost you a fortune in repairs.

  2. Tony on October 3, 2011 at 7:23 am

    What it takes is planning and discipline. The planning is easy to explain in a blog post (good job!), but the follow-through is another matter. Far too many people lack the self-discipline to make those plans happen, and they spend now and ask questions later.

    • Echo on October 3, 2011 at 10:43 am

      @Tony – I agree, planning is the key. People can say they’ll save up for a new vehicle, but unless they actually put a plan in place to do it before their current car bites the dust, they’ll end up borrowing.

  3. krantcents on October 3, 2011 at 8:48 am

    My cars are old (16 & 14 years old) and I have not had a auto loan for over 10 years. I hate thought of payments. I probably will replace these cars in the next year or two though. I thought about driving them into the ground, but I would like newer cars.

    • Echo on October 3, 2011 at 10:45 am

      @krantcents – That’s the problem, the cars made nowadays are so nice that it’s hard not to spoil yourself a little. 16 years is pretty old, I have a 13-year old car and it’s probably on its last legs.

  4. youngandthrifty on October 3, 2011 at 10:21 am

    This is a great post and that’s so cool that Moolanomy guest posted!

    I don’t have a car loan but I can see how vicious a cycle it can be, and so expensive!

  5. retirebyforty on October 3, 2011 at 4:56 pm

    Great idea about making the car payment to yourself. We purchased our last car with cash for the first time and I love not having to deal with a monthly payment. Hopefully this car will last 15 years!

  6. Leigh on October 3, 2011 at 5:24 pm

    Awesome plan! I bought a new car in 2010, so I’ve been setting aside money with the assumption that I will buy my next car in 2020. Maybe I’ll want to buy a fancier car next time, so I’m setting aside $3,000 per year. The interest I’m earning will somewhat help the funds keep up with inflation, so I should be set when I want to buy a new car!

  7. Kanwal Sarai - Simply Investing on October 3, 2011 at 8:36 pm

    Great post! I’ve never bought a new car, I only buy used or certified pre-owned and have thousands over the years!

  8. My Own Advisor on October 4, 2011 at 11:31 am

    Great minds think alike re: making the car payment to yourself!

    My 11-year-old car won’t last forever and we’ll be starting this process, this spring.

    Nice post!

  9. SE Book on October 4, 2011 at 5:52 pm

    These are great tips. I am currently going through do I keep it or get a new car. Although I am not one to buy new cars I do see the advantages and the disadvantages.

  10. SE Book on October 15, 2011 at 5:16 pm

    Great tips I just passed this article to a few friends who have been wanting a new car but I thought they hadn’t really thought it out yet.

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