Why it's dumb to have a car payment and what to do instead

Lets start with some facts. 85% of americans have car loans. Furthermore 430$ is the typical monthly payment and consumers in the united states borrow $34,635 on average for new automobiles as well as an average of $21,500 for used automobiles. I got these concerning facts from themakingofamillionaire.com and simplyinsurance.com. No matter if you like it or not, financing a car is pretty normal these days.

But here's the problem with financing cars. The reason you're financing is most likely that you cannot afford to buy the vehicle outright with cash. In times where most americans do not even have 400$ saved up for an emergency this sounds about right, doesn't it? So what you're basically doing is buying something you cannot afford and also don't need. Well of course you need a car but you do not need a model where you have to borrow $34,635 or $21,500 in order to buy it. Especially since more expensive cars normally also result in more expensive maintenance and higher costs of ownership in general. Something you really don't want if you already have to borrow money in order to buy the car in the first place, right?

So instead of financing and having an average monthly payment of 430$ that you really can't afford, what i would do instead is looking for a reliable and cheap (5000$ or whatever you can afford) used car from the 90s or 2000s. Once you found one, just buy it outright with cash. When living in the united states obvious choices would be toyotas or hondas but those tend to be more expensive because people know they're reliable and cheap to maintain.

You might be able to find a better deal if looking for vehicles from domestic brands like chevrolet, pontiac, buick, ford, mercury, lincoln, dodge etc. because those aren't as popular. What you try to find is a well maintained vehicle in good condition, ideally with relatively low miles and best case scenario from an elderly person that took care of it. I would also recommend to buy from a private seller to get an even better price. Since you don't need financing you don't need to pay more at a dealership. (Don't count on warranties when buying a cheap used car)

The good thing when considering something like a 1992 dodge intrepid or 1995 buick park avenue is that you can find great examples for very little money because nobody want's these cars. Other benefits include less competition and less dishonest sellers trying to rip you off. (Simply because there is no big market for these cars) You also don't have to sacrifice much since those cars usually come with AC, automatic, ~200hp engines, leather interior, cruise control, power windows etc.

Now that you have no car payment anymore this means you save - going by the average - 430$ each month. Let's say you invest those 430$ every month in an S&P 500 ETF (like VOO) that on average returns 10% per year (some years more, some years less) and you do that for a timespan of 10 years. After that you would have approximately $87,742.02 instead of wasting your money on car payments. If you did the same for 30 years you would have approximately $901,598.68. That's almost a million vs. nothing because you decided to have car payments instead.

Conclusion

So there you have it. Car payments can cost you a fortune and keep people from building wealth. Because of that i recommend you exchange yours for an affordable used car (paid for in cash) ASAP then start building wealth. Of course you can always buy a nicer car later once you saved up enough to buy it outright with cash. With that being said, many cheap used cars from the 90s and 2000s are actually pretty nice. You might be surprised what you can actually get for as little as 5000$. To sum it up, you can literally choose between becoming wealthy or ending up with a heavily depreciated vehicle worth almost nothing. Which do you pick? Let me know in the comments section below.