If you track your net worth using budgeting software or apps, you may notice that the value of your car is listed as an asset which can seem misleading.
Yes, your car is worth something and you can sell it if you need to, but as soon as you get behind the wheel and start driving it becomes a depreciating asset that loses its’ value over time. Plus, if you financed your car, you don’t actually own it. Thus, you should place your vehicle on the debt side of the equation since it’s not acting as an asset.
When I graduated college, I had a dead end job, no savings, and my 1997 car broke down. I was pressured to finance a newer vehicle that I was determined to pay off early. I ended up paying my car off last year, only after 18 months of my 60-month term. Here’s how I did it.
It All Started At the Dealership
Of course, my car loan triumph story starts where most bad auto financing deals take place - the car dealership. I knew I would have to finance my new car and that I would be alone because I didn’t have enough to purchase a car in cash, and none of my family members were able to cosign for me.
I say financing a car is often a horrible deal because interest rates can get ridiculous. As a recent college grad, my credit wasn’t established enough to secure one of those prestigious $0% APR offers that was advertised on television. My salesperson kept trying to sell me the ‘student discount’ financing program which would give me some cash back, but it required me to purchase a brand new car which was something I didn’t want to do.
The first thing I did right when financing my car was keeping it affordable. I chose a used car with low mileage that was about 4 years old and took out a $10,000 auto loan. The vehicle wasn’t brand new so I didn’t have to worry about taking out a $20,000+ loan and it wasn’t on its last leg either. Unfortunately, even though I had average credit, my interest rate was very high at 15.5%. I chose a 5-year term to stretch out my payments so I wouldn’t have to make $300-400 monthly payments starting out if I couldn’t afford it.
Making Double Payments
I wasn’t earning a ton when I first financed my car which is why I wanted a longer term so my minimum monthly payment would not exceed $250. I paid the minimum on my car for a few months then realized how much that sucked.
Over $100 of my payment was going to interest alone meaning I was losing money. Plus, my car still needed maintenance and repairs so it felt like I was spending a boatload of money each month just to drive around. I decided to prioritize getting rid of my auto loan by making double payments each month.
Lenders won’t encourage double payments, but most of them won’t forbid it or penalize you either so it’s worth a shot if you want more of your payment to go toward the principal balance and not interest.
Since interest accrued on my loan daily, I made a minimum payment each month followed by an extra payment of $300 during the first year. After that, I bumped my extra payment up to $700-800 per month to make more progress.
Establishing a Side Hustle
Normally, I wouldn’t be able to afford extra payments like those on my car loan each month. But, I felt like my debt was an emergency situation so I had to do some abnormal things.
Since I love to write, I decided to try my hand at freelance writing to earn some extra money.
After I learned the basics and started pitching my services to others, more money started rolling in. After paying taxes on the extra income I earned, a large portion of what was left went straight to my car loan.
Cutting Unnecessary Expenses
In combination with earning more, I also decided to cut some of my existing expenses to free up more money that could be thrown at my car loan. I decided to stop blowing my money on dining out, I quit shopping for clothes for 8 months straight, got rid of cable, chose a cheaper prepaid phone service, and skipped going on vacation last year even when I desperately wanted to.
I also took it a step further and moved to a cheaper apartment to cut my living expenses directly. All of these sacrifices paid off.
Utilizing a Lump Sum Payment
Whenever I received a bonus at work, gift money, or a lump sum payment like a tax refund, I tried to put it toward eliminating that pesky car loan. I received a sizable tax refund last year, and as much as it pained me to not purchase some of the things I needed or wanted, I put about 90% of it toward my car loan and used the rest of it to save up for car insurance.
My car was probably my highest expense last year, but I knew it was all worth it to become free from that debilitating debt.
Refusing to Give Up
Most important, throughout the entire process, I refused to give up. There were times when I looked at my statement and I paid so far ahead that my next official due date was actually two years away. At times, I fantasized about what I could do with the money if I skipped making a payment for just one month.
At the end of the day, I realized I needed to stay focused and motivated because even though I was putting a ton of money on my car now, I was saving myself so much money in interest that I would probably still be paying had I stuck to making minimum payments.
Last winter, I gave myself an early Christmas present by submitting the final payment for my car loan and it felt oh so sweet to receive the confirmation letter in the mail.
Now, I own my car in full and still have time to enjoy it before it depreciates over time. Plus, I can do so much money with my money without that unwanted debt.
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