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Avoid the Car Debt Trap

Just because you are in the market for a car doesn’t mean that you have to drain your bank account, or worse yet, go into years of financial servitude… umm… I mean debt. There are many ways to buy the car that you need at a price that you can afford. Let’s look at a few ways that you can still maintain fiscal sanity while purchasing a vehicle.

Avoid the Car Debt Trap

Car Debt TrapThe best solution to upgrading your wheels is to buy what you can afford to pay cash for. As long as your current car is running you should be saving for another one. So, just because you finally paid off your old car doesn’t mean you can rush out and buy a new one. Rich Dad author Robert T. Kiyosaki says  The Wealthy Buy Assets, the Poor Buy Liabilities, and the Middle Class Buy Liabilities Believing They Are Assets. By his definition, if you think a car is an asset you are wrong and are firmly in the middle-class category. The only thing that makes something an asset is if it pays for itself. So if you drive for Uber then yes your car is an asset otherwise it is a liability. And you should never go into debt to buy a liability. Which is why you should pay cash for your car even if you have to buy a $200 clunker to get back and forth to work. Then you should be saving what you would have spent on car payments. Then in 3 years (or less… since you will be earning interest instead of paying it) you can go out a buy a car for cash. And you will will be out of the car debt trap since you can then start saving for your next car.

When you get ready for your next vehicle…

Use Your Current Vehicle For A Down Payment

Check Car's ValueMost dealers will allow you to use the equity in your vehicle as a down payment. Trading in your vehicle may help you save on sales tax. This is because tax is only charged on the sticker price of the car minus the value of your trade. By trading in your used car you will have to come up with less cash. You have to weigh the sales tax savings against the extra you will probably be able to get by selling your vehicle privately. If you go to a site like Kelly’s Blue Book and click on the link entitled Check My Car’s Value you will be able to enter the pertinent information about your vehicle and get an estimate of how much you can sell it for and how much a dealer will give you as a trade-in.

If you’ve followed our advice and are driving a clunker while saving up for that newer vehicle it may not even be running anymore…

Sell Your Car To A Used Or Junk Parts Company

If your old clunker has given up the ghost you may have to call a used or junk parts company, who will tow away your vehicle (and may even give you some cash for it). Once it is back to their yard, they will then sell the car’s parts to others who are looking to make repairs or restore a vehicle of their own.

If you are handy with tools (or can follow instructions off of YouTube) you might be able to extend the life of your  clunker very inexpensively. Regular junk yards charge a hefty fee to remove parts from junk cars for you. But some places  like U Pull & Pay actually allow you to enter their yard for a small fee (often $2 or less) and remove the part yourself. This saves them the expense of hiring mechanics and inventorying all the removed parts. This in turn provides you two benefits. First, it saves you lots of money. Second, by removing it yourself you can see how it is supposed to go together, so when you get it home you know how to put it back together.

Hint: Remove your old one before you go to the junk yard and bring it with you. This has several benefits:

  1. You can match the new on to the old one so you’re sure the new one will fit.
  2. You will know what tools you need since you’ve already done it.
  3. You’ll have practice taking it apart. So when you remove the one at the yard you will be a pro.
  4. You get to practice taking it apart once more (hopefully quicker this time at the yard).

Then when you are finally home with the replacement part you should be able to get it back together in a jiffy. A repair that would cost you $500 to have a repair shop do it for you, might only cost $150 if you go to an auto-parts store for a new or rebuilt part. But it might only cost you $50 if you pull the part off a used vehicle yourself.

Don’t Forget The Role Financing Plays When Making A Purchase

If you choose to get a car loan to cover the cost of your next car, look for the lowest possible interest rate. You should also look to keep the term of the loan as short as possible to further reduce the interest paid on your car loan. Depending on your credit situation, it may be possible to get a loan at 0 percent interest when buying a brand new vehicle. In this case, getting a loan may make sense. The only caveat is that new vehicles often depreciate drastically the moment you drive it off the lot. Once again check Kelly’s Blue Book to compare the cost of a brand new vehicle versus one with 100 miles on it. You will see that they can easily lose thousands of dollars in value literally overnight.


Some images courtesy of blogpiks.com


About Tim McMahon

Work by editor and author, Tim McMahon, has been featured in Bloomberg, CBS News, Wall Street Journal, Christian Science Monitor, Forbes, Washington Post, Drudge Report, The Atlantic, Business Insider, American Thinker, Lew Rockwell, Huffington Post, Rolling Stone, Oakland Press, Free Republic, Education World, Realty Trac, Reason, Coin News, and Council for Economic Education. Connect with Tim on Google+