Save Money On Car Loans - Part 3

This is the third part of the series looking at how to save money on your next car. It's now time to look at the ultimate way to reduce the cost of your motor vehicles.

Stay Ahead Of The Game

The ultimate way to save money on your next car is to be in a position to buy it without a loan. And that's not as far fatched an idea as it might sound.

The idea is to gradually save money over the years that you keep the car, so that by the time you come to sell it, you'll have enough money (along with the trade in value of your old car) to purchase your next car outright. You then repeat the process with the next car.

Let's say you have a car worth $20000. You plan to keep it three years, by which time it will be worth $12000. Now allowing for inflation, your next car might cost perhaps $22000. That means you have to build up $22000 - $12000 = $10000 over the next three years. You will then be in a position to buy your next car without having to borrow any money.

This means you'll have to save $270 a month ($10000/36 = $278) over the next three years. Open a special bank account and keep it specially for the purpose of renewing your car. Add a certain amount to it every month and you'll never have to waste money on a car loan again. It's also a good idea to choose a car that will hold as much of its value as possible during the time that you keep it.

But you may have noticed a slight problem with this idea. After all, if you have to repay a car loan every month, it's going to be difficult if not impossible to save another $270 a month.

But there are two ways to get ahead of the game.

a) Save as much as you can each month, so that each time you change your car, you have to borrow less. Over time you'll reach the position where you don't have to borrow to buy a car.

b) Once you finish repaying a loan that you used to buy your car, keep it for as many years as possible. During that time, keep saving the money that you were using to repay the loan each month.

A example should help. You buy a car for $10000 using a three year personal loan for $367 per month. So after three years you own the car and have repaid the loan. So instead of changing the car or using the freed up income for other purposes, keep paying it into a different account for your next car.

After three more years you should have nearly $14000. That should be enough to replace your car with a similar size and model without using a loan. You are then ahead of the game.

All that's left is to work out how much to save each month for your next car. Just use the following figures;

- Decide how long you want to keep your new car - 36 months
- How much it will be worth then - $8000
- The cost of your next car - $17000

In other words, you need to save 17000 - 8000 = 11000/36 = 305. So allowing for interest on your savings, you should aim to save $300 per month. And I can guarantee that you won't resent the cost each month, especially when you know it's going to benefit you and not swell some lender's profits.

Previous: Save Money On Car Loans - Part 2

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