How Much is the Average Monthly Car Payment?

The average car payment today is $550 per month. I remember the day I sent my last payment for my 2007 Scion TC a couple of years before I was scheduled to pay it off and it was freeing and unbelievably awesome. Now I drive a paid off vehicle and plan to never have a car payment for any future vehicles I purchase. And I want to encourage you to really review how you purchase your next car or maybe you currently have car payment that you need to address. Right now you’re probably thinking I’m crazy and saying “Matt, not everyone can avoid not having a car payment.” Well, I think everyone can avoid having a car payment. I believe the problem is not everyone has been properly educated to realize just how much a car payment with interest really is.

Is Financing a Car Worth It?

I don’t really have a set of guidelines to follow, but I have one simple rule I live by when buying a car: have enough money to pay it all off at once. Avoid payments. Avoid interest. Avoid debt. Period. Did you know that the moment you drive a new car out of the dealership the value of the car drops 11%. A year later the same car’s value will have decreased by 25%. Guess what happens 5 years after you purchase a new car? The value will have gone down by about 60% of its initial value. So a $30,000 car you just had to finance is only worth $12,000 five years from the moment you sign for it…if you’re lucky and it’s still in decent condition.

What is the True Cost of a Car Payment?

Listen, I want you to have nice cars and great stuff. There’s nothing wrong with that…the problem is when you have to go into debt just to feel like you “need” those nice things. If it has a motor and you can only get it through financing, well YOU CANNOT AFFORD IT! Don’t set yourself up for a problem not worth having. Think about it: take that $550 payment you have for 6 years (because that’s how long it’s taking the average person to pay off a car) and you invest it or just save it. If you save it you’ll have $39,600. If you invest the same amount in a decent mutual fund in 6 years with a 10% annual return you will have about $50,923.

Now pay attention closely. If you leave that $50,923 and never add to it for for another 20 years, with a 10% annual return you will have $342,000. How much is that compared to the car you made payments on for 6 years that you probably do not have anymore? Let’s say you left the $342,000 alone to continue to grow another 10 years…after 36 years that $39,600 will be about $889,000. All this from a $550 payment that would have gone to car that would be worth nothing.

So whether you’re buying a car used or new my message is simple: save for it and pay for it. Don’t get trapped by payments and use the money that you would have lost by the depreciating value of the car to positively change your family’s future and other people in this world. I can think of 7 billion other ways we can use our money in better ways that can help this world. In the end, I want you to do the research for yourself and consult your financial advisor especially when it comes to investing.