Why I'll Never Have a Car Payment Again


One of the first “adult” financial decisions my wife Andrea and I made together back in 2008 was to sign a 36-month lease for a brand-new BMW at $550 per month.

We’d heard that sophisticated people leased vehicles, and it was a great way to build credit. Plus, the dealership told us we’d get free oil changes and car washes. And if there was a problem with the car, they’d even come to our house with a loaner, while they fixed it on their dime. Who wouldn’t jump at such an amazing deal?

Fast-forward to three years later, when we learned what kind of “deal” we’d really scored. Add up the $2,000 in fees we paid on the day we signed the lease, the monthly payments and the $320 we forked over for exceeding the mileage limit by 3,200 miles, and we’d spent a total of $22,320. And we still didn’t have a car.

We were given the option to buy the vehicle , but decided against it because of a key stat I’d recently learned: New cars lose about 60 percent their value in the first five years. Dealerships know this, and set monthly lease payments in order to cover the depreciation…and then some. (Why else would they offer all those free oil changes, car washes and loaners?) Had we opted to buy the BMW, we would have paid $43,000 for a car that had been priced at $36,000: $22,000 in lease payments, plus another $21,000 to purchase.

So what’d we do instead? We went out and bought a brand-new Acura RDX with no down payment, but with all the luxury bells and whistles—plus a $649 monthly payment for the next 66 months! You’d think we would have learned our lesson, especially because we avoided the lease buyout for the same reason, but the salesman was persuasive. He said he’d given us a VIP offer, and if we didn’t pull the trigger that day, we’d miss the opportunity of a lifetime.

Once we pulled into our driveway, I was excited to do some research to find out how well we did. What I discovered was that not only do cars give up 60 percent of their value in the first five years, but new cars lose about 10 percent of their resale value the minute you drive them off the lot.

Translation: The car we’d just paid $36,000 for was worth $32,400 an hour later. And just a few years down the road, it’d be worth $14,400. Tack on our 3-percent financing rate, and we’d pay almost $43,000 for it. Ouch.

This realization ultimately helped us come to our senses 11 months later, in the midst of our journey to pay off $52,000 in debt . We sold the Acura for $28,000, and paid $14,000 cash for a 2009 Kia Sorento.

Since then, Andrea and I have agreed to only purchase vehicles that are four years or older—after they’ve lost most of their value. I currently drive a 2002 Yukon Denali, which the original owners bought new for $47,000. I paid $8,000 for it 11 years—and 133,000 miles—later. (As an older model, it does require annual maintenance and repairs that average $500 a year. But that’s still better than a $650 monthly car payment.)

Since we no longer have car payments, we’ve started making monthly “car payments” to ourselves for the next time we need to replace a vehicle. The idea is that if we make $400 car payments to ourselves for 10 months, for example, we could purchase a car in cash for $4,000. If we drive it for 10 months, while continuing to pay ourselves $400, we’d bank another $4,000. Then we could sell the car for $3,995—remember, the car will have lost most of its value already, and it’s not likely to drop significantly over this period—and apply the extra $4,000 toward a nicer, used $8,000 vehicle. Repeat this one more time, and we’ll be driving a paid-for, $12,000 car in less than three years.