How Much Is Your Car Costing You?

I realize car prices are very high these days. And that means many of you need to borrow to buy a car.  If you truly need a car, I have no problem with that. But your goal should be to buy the least expensive car possible, finance it for the shortest time possible, and then drive it for as long as possible.

But according to car buying data firm Edmunds that’s not what a lot of people are doing.

Edmunds says that 1 in 4 people who bought a car in the fourth quarter of last year still owed money on the car they were trading in. So not only did they have to pay for the new car, but they also had to pay off the remaining balance on their old car. And it typically isn’t a small sum. Edmunds says the average remaining balance is more than $6,800. And 1 in 4 trade-ins still owe more than $10,000.

But here’s what really got my attention: the average age of the car being traded in was around three years old. Trading in a three year old car that you are still in debt for? And rolling over that debt into the loan for a new car? Are you kidding me? That is just spending on a want, not a need.

And it’s financially dishonest if you also insist that you can’t afford to save more for retirement, pay off credit card debt, or save more for a home down payment. Trading in a car you still owe money on after just a few years is why you can’t afford those other important financial goals.

So let’s get honest here. A three year old car has many good years ahead of it – reliable years. The goal should be to keep driving it, hopefully, longer than it takes to pay off the car loan. That way you might have a few years where you don’t have to make a car payment. Which frees up a lot of money to use for important financial goals.

The average new car payment is now more than $700 a month and the average used car loan is more than $500 a month.  Another way to think about this is that if you get your loan paid off and keep driving the car, you could have $6,000 to more than $8,000 a year that could be used for other goals. Including saving up so you don’t have to borrow so much for your next car, or so you can finance it for fewer months.

I hope you and all the drivers in your household will think long and hard about how your car spending could be one of the reasons you don’t have the cash to put toward goals that create lasting financial security.