Down with Auto Loans!

Let’s use some critical thinking and a little easy arithmetic to improve our long-term financial situation.  The question for today is:  Why should anyone older than 45 ever need an auto loan?

Suppose you buy your first new car at the age of 25.  You have very little to put down and get a 4-year loan (by buying a car you can afford to pay off in 4 years).  Keep the car for 6 years.  For the final two years of ownership, continue to make the car payments to your own bank account.  When you are ready to buy a new car, you will have some trade-in value for the current car – probably around 40% of the original price.  You will also have a new car fund worth more than half of the original price of your first car, because you made two years of additional payments to yourself, which included interest.  Even if auto prices went up by 4% per year, you could still buy a comparable car and be able to put about 75% down – a far cry from the zero down on your first purchase.

Now you are 31 and could even afford to splurge on a car 10% more expensive.  When you put down all of that money, that car will be about 68% paid for when you drive it home.  Making exactly the same payments (not adjusted for inflation or anything) and the car will be yours in less than two years.  Keep making payments to yourself while you keep the car for 6 years. 

At age 37 when you trade your car in, you will be able to afford 88% of a new car that is again 10% better than the one you traded in (or buy a comparable model for cash).  In either case by following this same pattern, in 6 more years you will be 43 years old and be able to buy your cars for cash for the rest of your life.

Remember, those monthly car payments, mostly paid to yourself, never increased from the time you were 25.  Presumably your income has increased but the monthly cost of your car fund has remained stable and you no longer rely on auto loans.  Wouldn’t this be a great way to become more financially secure and also get back at those "greedy" bankers!  And if you are no longer 25 years old, it's not too late to start.