Auto Financing Does Not Preserve Cash Reserves
Imagine there was no such thing as credit.
How would you manage your money if you absolutely had to pay cash upfront for everything you buy?
Further suppose that the total of all of your cash on hand were $35,000. If that were true, would you consider paying cash for a $35,000 vehicle?
No? Why not? That's right, because since you can't borrow money to pay for your other necessities you could not afford to dwindle your cash reserves by such a large margin.
Well, whether you realize or not, the amount of money you will earn in your lifetime is a fixed amount (see the Lifetime Earnings Calculator for an estimate). In other words, whatever your lifetime earnings will be, that amount is what you have for lifetime cash reserves.
What most of us fail to consider is that each time we buy something on credit (mortgages, loans, credit cards) the amount of our lifetime cash reserves shrinks by more than just the purchase price of what we are buying. They also shrink by the loan fees and interest costs.
So what does this have to do with the automobile loan payment calculator?
After you calculate the monthly car payment, pay close attention to the result in the field marked "Interest cost." And then mentally multiply that number by the number of automobiles you think you will finance in your lifetime.
Two cars in your household? Then double the result. That, my friend, is a huge chunk of your lifetime cash reserves. And for what? So that lending institutions can have the nicest buildings in town?
Become Your Own Auto Finance Company
How? First, become fully aware of the hidden costs of buying and owning an automobile by using this and other calculators in the auto calculator collection.
Next, forgo higher priced vehicles that you could afford and instead purchase their lower-priced, functional equivalents.
Then, using the difference between the monthly payment of a higher priced new car and the monthly payment of a reasonably priced used car, start to make a small car payment to yourself each month in the form a deposit to your savings account.
If you do that, each time you find yourself in need of more reliable transportation you will then be able finance a larger portion of the automobile loan yourself.
As your principal and interest savings add up you will eventually be able to pay cash for your automobiles. And because you'll be paying with cash that you've already worked hard to earn, I guarantee you will be far more thrifty when it comes to car buying.