How to buy a car with cash

Savings Angel

This article, entitled "Buy a Car with Cash? You Can Totally Do That!," comes from

I want you to envision life without a car payment.

What would it be like to live your life without shelling out $200, $300, $400 or more to a lender every month? Imagine how having that extra money could transform your budget. You might finally get to take a guilt-free date night with your spouse. Or it could mean you’re able to pay for sports camp for the kids without scrambling to come up with the cash.

Auto loans have become a way of life in America, but I think it’s time to stop borrowing for vehicles that are going to see their value depreciate to practically nothing in a few years time.

Here are a few tips to help you buy your next car for cash.

Hold on to your current ride as long as possible

Some people anticipate problems before they even occur. Their vehicle hits a pre-determined mark – it could be five years old or the odometer rolls over to 100,000 miles – and they decide it’s time to upgrade.

Before you automatically buy a new car, ask yourself why. Is your vehicle really at the end of its lifespan? Or are you simply bored with your car?

If you want to pay cash for your next vehicle, you need to keep your current one as long as possible. Yes, it’s going to need some repairs and more maintenance as it gets older, but replacing brakes and belts and sensors is usually cheaper than what you’d be spending for a new vehicle payment.

Remember, by all accounts, 200,000 is the new 100,000. With proper care, many vehicles can easily hit 200,000 miles today. No need to ditch your car prematurely when it’s running just fine.

Create a car fund

By holding onto your car as long as possible, you should eventually come to the point where you’ve paid it off. I know that gives you all sorts of new money to play with but stay disciplined and put at least a portion of it in the bank. It’s even better if you keep making that car payment, but pay it to yourself each month.

Put the money in an online checking account or money market account where it will earn a little more interest than what you’d get from a brick-and-mortar bank. The other benefit of using an online account (without a debit card) is that it keeps the money accessible but not so convenient you may be tempted to dip into it for other purposes.

Select the right car when you do need a loan

If you’re self-disciplined about paying your car fund every month, you should be in good shape to buy a decent used car for cash once your current car finally goes kaput.

But what if you need a car right now and have no cash? In that case, you need to be smart about which car you buy. Let’s say your bank approves you for a $25,000 auto loan. For a five year loan at five percent interest, your monthly payment would be $471.

So you could go buy that car or you could get a used car for $5,000. Your monthly payment may be only a hundred dollars or so. However, you want to pay off this car quickly so you’re going to send in the $471 you would have spent on the $25,000 car. With this payment amount, you’ll have paid off your $5,000 loan in less than a year.

Don’t stop saving though! Keep putting that $471 aside for the next four years (the same length of time you’d be paying on the $25,000 loan), and you’ll have a little less than $23,000 to spend as a cash payment for a new car when the old one finally dies. Plus you’ll have saved more than $3,300 in interest and any resale value from the $5,000 car.

Peace of mind is priceless

See how that works? You’re paying the same amount each month either way. But by buying the $25,000 car, your money is tied up in a depreciating vehicle. With the $5,000 vehicle, you’re paying most of your money to yourself.

What’s more, without a car payment hanging over your head, you’re in better shape in case an emergency comes up. If you were to lose your job or have a medical crisis, you can stop those monthly payments to yourself without worrying about losing your vehicle.

Paying cash can give you more negotiating power and may even help build wealth if you decide to buy a $15,000 car instead of a $23,000 one after five years.

Think about it. Why would ever want a car payment again?

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