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First, I would like to share some interesting numbers with you.
- The average monthly car payment in the U.S. is $563 for new vehicles, $397 for used vehicles, and $450 for leased vehicles.1
- If you invest $563 a month in a reliable fund such as the S&P 500 with an average 12% return, you will have around $130,000 in 10 years and ONE MILLION in 25 years!
- The average value of a new vehicle drops around 20% in the first year of ownership and will drop up to 60% of its value within the first five years! 2
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Should You buy a car with all cash?
In most cases, YES! If interested, I wrote another detailed article explaining the pros and cons of leasing vs buying a car.
Back in the day, I took out a car loan to buy a land rover. This vehicle later became my worst nightmare. If you want to know more about this story, you can visit the article I wrote about why financing a car can be a bad decision.
I am very grateful to have later learned about Dave Ramsey. After watching many of his videos, my wife and I insisted on buying a car with cash.
So let’s dive in and see the 6 reasons to buy a car with cash!
1. Avoid Interest
If you don’t finance a car purchase, you can save a lot of money by avoiding interest payments on the car loan.
This may seem completely obvious but is worth repeating.
“The average auto loan rate is 3.64% for new cars and 5.35% for used cars”, according to Experian.
Paying interest on a car may seem normal, but it is not beneficial and will make your lender very happy and wealthy.
2. No Monthly Car Payments
Since my wife and I own our car and purchased it with cash, we don’t have any additional car monthly payments – this has greatly reduced our monthly expenses!
That’s one reason why we can save 56% of our income and allow us to invest more in our future.
Monthly payments means living paycheck to paycheck and not experiencing true financial freedom.
It’s a big deal if someone suddenly loses their job or has other emergency expenses that need to be resolved. Keeping expenses low and savings plus investments high is important to have peace of mind.
Instead of paying a monthly payment to a car that won’t hold its value, why not spend it where it will appreciate?
For example, a great place to put the extra money saved from not paying interest payments could go towards retirement/tax-advantaged accounts such as a Roth IRA, 401(k), HSA, etc.
“The average monthly car payment in the U.S. is $563 for new vehicles, $397 for used vehicles, and $450 for leased vehicles.” 1
If you invest $563 a month in a reliable fund such as the S&P 500 with an average of 12% return, you will have around $130,000 in 10 years, and ONE MILLION in 25 years!
3. Depreciation Doesn’t Matter
“According to industry experts, the value of a new vehicle drops by about 20% in the first year of ownership. Over the next four years, you can expect your car to lose roughly 15% of its value each year – meaning the average car will be worth just 40% of its purchase price after five years:
- A 5-year-old vehicle that sold for $40,000 when new will be worth $16,000.
- A 5-year-old vehicle that sold for $30,000 will be worth $12,000.” 2
What does depreciation mean?
The difference between the price you pay and the price you can sell something is called depreciation.
Cars depreciate quickly, especially new cars. The moment you leave the parking lot on a brand-new car, it starts to lose its value.
If you finance the purchase, you could end up owing more than the car is worth.. especially if you have a long loan term.
How to avoid depreciation?
Easy, buy a car in cash!
How can paying cash can help with depreciation?
If you already own the car, depreciation won’t hurt so much!
By already owning your car, you don’t have to worry about not being able to keep up with the car loan payments or needing to pay more than it’s worth.
4. The Vehicle is 100% Yours
I still remember receiving the car title letter saying I am the car owner. That was exciting, especially since I saved so hard to pay for it all in cash.
It feels very different when you drive a car without a loan. There’s no worry about monthly car payments. You don’t need to worry about car depreciation.
That’s the peace of mind that comes with buying a car with cash!
5. Prevents You From Overspending
Financing the purchase of a car will encourage you to spend more than you plan to because you will focus more on monthly payments rather than the car’s total price.
“Just because you can make the payments doesn’t mean you can afford it.”
Dave Ramsey
When planning to buy a car with cash, you have to buy it with the money you have on hand, so you will have to stick to your budget, and it will be easier to talk to sales representatives!
I bought my Toyota corolla from my brother-in-law. I remember he showed me some nicer cars, but I always said, “sorry, this is not in my budget.”
Buying a car with cash really can help prevent you from overspending.
6. Won’t Effect Your Debt-To-Income Ratio
A car loan will affect your DTI (debt-to-income) ratio and eligibility for other loans, such as a house mortgage.
Lenders want to ensure you have enough money left over to cover other living expenses and extra cash flows.
Most mortgage lenders generally approve someone — including their new mortgage payments — when their debt-to-income ratio falls to 43% or less.
When you have a car debt, your buying power will be lower (higher DTI) when looking at homes.
You’ll have more room for DTI to buy your dream house when you don’t have car debt.
Quick Recap:
- Avoid Interest
- No Monthly Payments
- Depreciation Doesn’t Matter
- The Vehicle is 100% Yours
- Prevents You From Overspending
- Won’t Effect Your Debt-To-Income Ratio
Throughout my life, the Land Rover Defender model has always been my dream car.
My motivation is knowing that one day I will buy a brand new Land Rover with all cash.
I believe it will happen, and I will work hard to make that dream come true, including saving and investing to make it happen!
Others may think you’re crazy for not getting a car loan or driving an older vehicle, but it will be worth it in the end!
What are some of your positive experiences buying a car with cash? Please let us know in the comments section below!!
If you’re having issues with improving your credit, I highly recommend checking out The Credit Pros! They are a very reputable company that offers incredible credit repair services.
They have all of the tools needed to help rebuild your credit, and you can check your credit score for free!
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
