Purchasing a Car Without Going into Debt

In our teens and 20s, the largest purchase we'll usually make is for a new set of wheels. If purchased on your own, it's rarely going to be a new car, but it's new to you! But even used cars, if they are going to be reliable, are going to cost several thousand dollars. Not wanting to be burdened with a large amount of consumer credit debt, I looked around for methods of car buying that wouldn't make me a slave to some car loan. Here's what I found, and what I put to use.

Budgeting for a Personal Loan for Car Buying

Simply put, budgeting pays. If you've already been paying on a car loan, resist the urge to spend that couple of hundred dollars when the previous loan is paid off. Otherwise, if you have no car loan and an older car, or no car, expect that a car loan will cost you at least a couple hundred bucks a month for several years. You should begin saving that much while you don't have a car payment. Figuring full coverage auto insurance will cost you another $50-$100 per month or more, depending on your driving history and location, save that amount too. By saving, say, $225 per month for your next car, and an additional $100 for full coverage insurance per month, you'll be prepaying these amounts for your future purchase. In effect, you'll be providing yourself with a personal loan for your next car. The trick is to start saving as soon as possible and as much as possible in order to build up a reserve of cash to finance your own car loan.

Selecting a Car

A year of saving can build up over $3,000, or close to $4,000 in the example I used above, which is enough to purchase a higher mileage, but still decent, older model with about 5-8 years of usage. If you can stretch your savings to a year and a half or two years, you'll be in even better shape. There's nothing wrong with buying an older model car. They're often easier and cheaper to fix, and can go a long time usually before needing a major repair. What you need to look for is something at least 4 years old, probably older if your savings is under $5,000, with as few miles as you can find. Generally, anything under 100,000 miles is fine, but many cars will hit 200,000 to 300,000+ miles with proper care and maintenance. Check the reviews on a car you're interested in, and definitely check the CARFAX report for a vehicle you're serious about to see if it has been junked or seriously damaged as it may be unsafe. If everything checks out, take it to a trusted mechanic for a detailed inspection so you'll know if anything major needs to be done.

Being Your Own Lender

Once you've picked your car, you're in good shape. You're paying with cash, so there's usually some decent room for negotiating. Dealers will often go down in price for folks who are paying cash because there's no loan approval process and they don't run the risk that you'll miss any payments. Get a cashier's check for the negotiated amount, leaving a little left in your savings for any minor repairs and pay for your new ride. You can now either choose to fully insure your car, or, as you don't have a car loan, you can choose to only get liability insurance which is much cheaper. Take a month off and enjoy your car, and then start the process all over again for your next car!

Doing this can mean avoiding costly consumer credit. Every bit of money you pay yourself towards your personal car loan is put into your savings account and earns interest, instead of a traditional car loan in which you pay the lender a small amount of principal and larger amount of interest, which you'll never get back. I used this method and ended up replacing a 1997 Buick Skylark with 300,000 miles on it, only after it started having major electrical problems. I replaced it with a brand new - fresh from the factory car. The personal loan system works, if you are disciplined enough to stick to it!