There’s nothing wrong with having nice things like a comfortable late-model car—as long as you can afford them.
Of course, if you can’t afford to purchase expensive products outright, a bank or lender will often lend you the money upfront and let you pay it back on an installment plan.
Sounds generous—until you realize just how much extra this arrangement can cost you in interest fees. To find out the dirty details, try punching some numbers into the calculator at Cars.com.
[F]or example, let’s say you wanted to buy a $30,000 luxury sedan but only had $10,000 on hand. According to the Cars.com calculator, financing $20,000 of the purchase at 7.45% interest over four years will end up costing you $541 per month.
That sounds manageable, but if you crunch the numbers and multiply the monthly payment by the length of the loan (48 months), you’ll discover that the lender recoups a shade under $26,000.
That’s right—you pay almost $6,000 for the privilege of spreading out the purchase over four years.
Paying all cash upfront lets you save loads of dough in the long run. If you don’t have enough cash on hand for such a large purchase, consider buying a more affordable model so that you won’t have to finance as much of the purchase price.
Once you’ve got the car paid off, put off the temptation to trade it in for a newer model. As long as the car is mechanically sound and doesn’t require expensive repairs, you should be able to drive it for many years. As the author of the No Credit Needed blog points out, every month that you don’t make a car payment to the bank, you can pay yourself and make a deposit into a savings account.
Instead of accumulating debt, you’ll be earning interest on those savings—stashing away money for a rainy day so that if you do encounter a major expense, you can handle it without resorting to loans or credit cards. And if you invest the money wisely, you could even supplement your income and create more wealth.
Avoiding loans so that you can pay yourself instead of paying the bank helps you save money in the short run and [over] the long term.
How do you handle car purchases—cash, loan or lease? Do you have a savings strategy for “paying yourself” every month? How do you resist the temptation to splurge and stick to purchases that you can afford?