Key Takeaways
- Don’t tie up your cash when you’re young, but you have to be smart about your loan terms.
- Making slightly larger, or more frequent, payments than you’re required to can add up to HUGE savings down the road.
- A used car is often better than new when you’re young—especially when the savings is applied to higher-rate student loans and credit cards.
I’ve finally stricken the words “always” and “never” from my lexicon. Why? Because as I get older, I realize things aren’t so black and white. For instance, 30 years ago, the conventional wisdom was to always buy a new car, not a used one. But today you might want to consider the benefits of buying a used vehicle, especially when you’re young.
Here are two key benefits:
- Lower loan payments. According to the Kelley Blue Book, the average cost of a new car is $33,000. Even a new Hyundai costs $25,000. If you get a five-year (60-month) loan at the prevailing 3 percent interest rate, you can expect to pay about $449 a month. But thanks to depreciation, a one-year-old Hyundai in good shape is worth only $20,000 and a two-year-old version of the same model is worth just $17,500. So a $20,000 loan at the same 3 percent rate is just $359 a month and a $17,500 loan at the same rate is just $314 per month. If you go with the two-year old car, you’re saving roughly $135 a month ($449–$314) or a whopping $8,100 over the life of a five-year loan.
- Faster paydown of other debt. Instead of spending that $135 per month you’re saving on the loan for the older car, you could apply that money toward your student loan. Let’s say you have a 10-year, $15,000 student loan at 7.5 percent interest. That’s $178 a month. But if you take that $135 per month you’re saving on your car loan and add it to your student loan payment, then you’re chipping away at your loan by $313 a month, not $178. As a result, you’re paying off your loan five years earlier, which will save you about $11,000 over time. That’s all from using the savings on one loan to pay down another (more expensive) loan.
By buying a used vs. new car when you’re younger and don’t have the money, and by paying off student loans, credit cards and other debt early, you will be well on your way to accumulating wealth. It makes a big difference.
Conclusion
Still not convinced? Go to Bankrate.com and play around with the loan amortization calculator. Plug in the terms of your loans and hit the amortization schedule, and you can see your payments under different scenarios. See what happens when you make accelerated principal payments! You’ll be amazed at the difference, especially when you’re first starting off and trying to accumulate wealth and pay down debt.
Until next time, enjoy.
Gary