How to Never Need a Car Loan Again

Tired of being chronically tied to a car loan? I was too. Every time I needed a vehicle, I was stuck signing a loan agreement and paying hundreds each month for approximately five years. If you’ve already tackled high interest debt, (like credit cards), try this technique to avoid car loans in your future:

Purchase modest, reliable vehicles

While the newest ‘bells and whistles” are appealing, opting for a lightly used, reliable base model, like a Toyota Corolla, is the way to go. Limited add-ons translates to fewer electronic components to fix down the road. Skipping these add-ons also means fewer driving distractions (do we really need those giant screens built into dashboards these days)? Tip: check out Consumer Reports for in-depth vehicle reliability information.

Keep up on car maintenance (even the basic stuff)

Arguably, the best way to avoid costly car repairs is maintaining your vehicle at the recommended intervals. Don’t put off those car washes, oil changes, or brake jobs. Well-maintained cars are more likely to last longer, have a higher dealership trade-in value, and a larger insurance payout in the event of an accident.

Keep your car for ten years

While it’s temping to trade in your existing vehicle for an updated model, hang on to your trusted older car. Even if you spent the first several years of car ownership paying off an auto loan, maximize your current loan-free years by saving for a replacement car.

Save your monthly auto loan payment after your loan is paid in full

Even after you’ve paid your loan off, continue to set that monthly sum aside. It was already in your budget, so why not plan for a loan-free future vehicle? Tip: set aside your vehicle savings in a money market account to earn interest.

Keep full insurance coverage even after your auto loan is paid off

While switching to liability coverage is a temping way to save money, if you crashed your car tomorrow, would that pose a financial hardship? If yes, keep that full insurance coverage with a reputable company.

Real life example:

I was paying $262/month for my car loan, so after making the final payment, I continued setting the same amount aside in my money market account (with a 1.75% APY at the time). When my 13-year-old high-mileage car began showing signs of a transmission issue, I started researching a replacement vehicle. After looking for a while, I found a well-maintained, reliable used car for a total of $17,500, and after getting a $5,000 trade in credit for my existing car, I paid $12,500 out-of-pocket. The total I saved over five years for a replacement vehicle was approximately $19,600 (including interest accumulation), so I still had over $7,000 remaining. The left-over savings will help offset a future vehicle’s inflation-induced price increase. I continue to save each month for a future vehicle, (while earning interest on my savings), so I can enthusiastically declare that car loans are in my past!