After New Year’s, many folks reflect on how they can better their financial situation in the next twelve months. Naturally, a number of popular outlets will try to get your clicks by giving some helpful advice. Unfortunately, this one from Yahoo! Finance on how to pay your car off in a year totally misses the mark.
The article provides some guidance on “How To Pay Off Your Car Loan In 12 Months,” yet it fails to articulate exactly why this would be beneficial to do so, other than having the freedom of no car payment. What follows is a smattering of some sound car financing strategies that are ultimately burdened with what amounts to fairly unhelpful advice to the target audience.
The author starts with “Buy Less Car Than You Can Afford.” And he is right, more people would benefit by focusing on what they need rather than what they want, and buyers would be less likely to be stretching their wallets when it comes to monthly payments. However, the article takes that to the extreme by suggesting that instead of spending the average new car price of $42,258 to look at dramatically cheaper options
“Three cars — the Chevy Spark, Mitsubishi Mirage and Nissan Versa — all come with sub-$15,000 MSRPs. If you require a little more oomph than bare-bones, entry-level subcompacts can offer, there are dozens of other, better vehicles still well inside of $20,000. Start there.”
To realistically expect someone targeting a $40,000 car, likely some kind of crossover or SUV, to all of the sudden go for a Nissan Versa is wildly naive. First of all, these sub-compacts are not ideal for moving more than two people and in this current market even finding one of these so-called “cheap” cars at a reasonable price is a challenge.
Vehicle choice aside, the author continues to make a good point of applying a downpayment of at least twenty percent of the purchase price to establish equity and reduce your loan balance. However, the approach here is to use that downpayment on an affordable car with only a one year loan making the car payments look like mortgage payments -
- If you put zero down on an $18,000 car at 3.11% interest for one year, you’d make 12 monthly payments of $1,525
- If you put 10% down ($1,800), your monthly payments would be $1,373
- If you put 20% down ($3,600), your monthly payments would be $1,220
Let’s be real for a moment, anyone that can handle car payments of $1200 or more isn’t coming to yahoo! finance for budgeting advice, and those that really need help managing their finances will find that spending that amount on a car note incredibly burdensome.
To put the last two tips into a different perspective, this is like saying to someone who wants to lose some weight - “Reduce your daily calories by half then go to the most expensive grocery store and spend triple on your food costs.”
Paying off your car loan in one year at the expense of cash flow is just not feasible for most and probably foolish for those who can. If you have a manageable monthly payment with a competitive interest rate, you are far better off paying down other debts with that extra cash or investing it into something that will get you a return.
(Tom McParland is a contributing writer for Jalopnik and runs AutomatchConsulting.com. He takes the hassle out of buying or leasing a car. Got a car buying question? Send it to Tom@AutomatchConsulting.com)