how to kill your car debt in 3 easy steps

how to kill your $40,000 car debt in 3 easy steps

If you’ve had a chance to peruse our last spending report you’ll see that we are currently spending a RIDICULOUS amount on our automotive category.  $2,522.27 last month! Of that total $1,306.65 was payments to vehicles. One big goal we’ll have as we try to create more room for savings in our budget is to decrease, over time, our spending on cars.  Cars are depreciating assets.  Depreciating assets should be a means to an end as, financially, they only serve to bring down your rate of appreciation.  It makes sense to keep this depreciation as small as possible if you need to own a car.  This is how to kill your car debt in 3 easy steps.

Spending on Cars, What we drive.

I’ve written before about my 2017 Chevy Volt.  Erica drives a 2017 Ford Explorer.  Both cars are practically brand new.  We didn’t listen to the sage advice to buy junkers or certified pre-owned vehicles.  We’ll need to come up with a plan to wind down this cost over time.  This is an achievable goal, but it won’t happen overnight.

How to kill your car debt.

2017 Chevrolet Volt Premier

I leased this car.  Yikes, I know.  I went into the reason I leased it here.  Short story short, an electric car should be leased and not owned.  Honestly, when it came to purchasing it I had to make a decision about what I was going to do.  Lease or Buy.  I chose the lease for a few reasons.  In the end, the purchase may have made more sense.  This will end up depending on my actual value vs residual value at the end of the lease.  I took a gamble that the car I wanted to drive was going to be worth less at the end of the lease than the residual value they were quoting me.  I’m not going to know if I was right until 2020.

My lease terms on the car are 39 months; 15,000 miles per year; and $0.25 per additional mile; for $509 per month.  I made my first payment on April 17th of 2017.  So I’ll make my last payment on July 17th of 2020.   22 months from today.

The Cost of a Commute.

This is one major disadvantage to a lease, you are trying to hit your anticipated mileage perfectly to keep from throwing away lease miles or paying for extra miles.

My first year included driving to a work project about 70 miles from home and I racked up miles because of this.  I’m going to end up over my allotted miles to the tune of $0.25 per mile.  So, if I end up 8,000 miles over (which isn’t outlandish) I’ll owe an additional $2,000 at vehicle turn in.  This is one major disadvantage to a lease, you are trying to hit your anticipated mileage perfectly to keep from throwing away lease miles or paying for extra miles.

As part of my compensation, I receive a monthly vehicle allowance of $650 which is intended to cover my wear and tear and fuel purchase on miles driven for work.  At the current federal rate of $0.545 per mile, this covers up to 1,192 miles driven.  Most months I’m not getting anywhere near that amount and for the last few months, I’ve been averaging closer to 350 miles per month driven for work.

A Lease is finite.

The big decision with the Volt will be whether I will Buy or Turn In when the lease runs out.  I’ll have the option of handing it over, paying damage and additional mileage fees OR purchasing the car at the anticipated residual value plus a purchase fee.  Whatever option I’m choosing I think I”ll have a hard time escaping a fee.  Imagine that.

It would be great if I could have a car purchase fund in place before July of 2020.

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2017 Ford Explorer Platinum

We purchased Erica’s car in November 2016.  We financed $36,460.19 of the purchase price after trading in our old 2011 Explorer Limited and putting in some additional cash.  This was financed on a 48-month loan (a little long for my tastes) and at a 2.34% interest rate.  That rate is not as good as the ubiquitous 0%, however, it’s certainly still cheap financing.  Our payment on this loan is $797 per month.  Currently, we owe $20,945.  We’ll be finished paying this off in December of 2020.

The Explorer seats six people.  As a family of four, it’s not necessary for us to seat six in all but a few occasions each year.  The extra room comes in handy hauling kid gear, groceries, and the occasional Ikea purchase.  I don’t see us living without the additional seating and space for the near future.

It should be noted that the least expensive 3-row vehicle is $23,090.  What a stretch from our purchase price.  What’s the difference?  The difference stems from luxury features.  The unnecessary luxury features included in the Platinum model that WE LOVED.  We could have done without them, but we had our reasons for purchasing them.

Features we loved.  But did we need them?

  • Ventilated Front Seats.  It’s Texas, it gets hot.  We found that we loved this feature in our 2011 model and it came standard on the Platinum.
  • Turbocharged V6 Engine which produces 365 HP.  This is the same engine in the very popular Explorer Sport.  It’s pretty suite and it takes this heavy vehicle to 60 mph in 5.8 vs the standard V6 which did it in 7.9.
  • Sony enhanced stereo with 12 speakers and a 14 channel amplifier.  This is one the best vehicle audio systems we’ve ever owned.  It’s too bad most of the time we can’t use it because of competing child electronic noise!
  • Moon-roof.  I could take or leave this option.  Erica never uses it.  But it’s standard on the Platinum.
  • Auto high beams.  We might get a small insurance discount for this one, but it’s more annoying than useful.
  • Rain sensing wipers.  Useful, but not enough to pay for it.
  • LED Headlamps.  These are very nice to drive with.  Erica drives in the dark many mornings out of the year on roads which contain deer, bicyclers, and crazy Texas drivers.
  • Acoustic Glass and additional Acoustic Materials.  Ford packed the Platinum in sound dampening materials and you can certainly tell.  It’s a quiet ride.
  • Lane Keeping Assist.  This sounds good in theory, and we probably get an insurance discount for it, but it can be finicky and works about 70% of the time.
  • Blind Spot Warnings.  I’m never purchasing a car without this feature again.  I’m amazed that the federal government hasn’t mandated the feature.  We’ve both found it keeps near misses down.
  • Radar Cruise Control. This feature we had on our 2011 Explorer Limited.  It’s very nice to have and I use it all the time when driving.  Erica never uses it though.  The Explorer’s version doesn’t allow it to be used at less than 25 mph so it can’t be used as a traffic aid.
  • Leather-wrapped everything.  One huge benefit of the Platinum over the Limited or Sport is the amount of leather, luxury leather, that is on every surface.

Cost To Own

With the electrification of cars (see Volt above) and the increased use of AI in driving I think the car market will be drastically different when we are looking at trading this in.

All of the above sounds like an advertisement for the Ford Explorer Platinum, but it should be stated that this car is EXPENSIVE.  It almost hits luxury maker levels of expensive.  The vehicle purchase price was approximately $52,000 after tax.  This is about 100% of Erica’s annual income and about 33% of our combined income.  Yikes!

How to kill your car debt.

So what were our thoughts on purchasing such an expensive car?  Our plan is to continue driving this car until it hits 160,000 miles.  We put about 15,000 per year on it currently and that should give us over 10 years in the vehicle.  With the electrification of cars (see Volt above) and the increased use of AI in driving I think the car market will be drastically different when we are looking at trading this in.  Currently, the car is worth about $34,000 and is averaging depreciation of $900 per month including the very big hit we took driving a new car off the lot.  ::sigh::  Let’s be honest, that is a lot to be spending on the car(s), let alone one car.

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The formula for depreciation per month

And, let’s be honest, leasing is pure depreciation.

((Purchase Price) – (Current Value)) / Months Owned

Based on the value we sold our previous 2011 Ford Explorer I expect to be able to sell this car for about $8,000 at 160,000 miles.  This equates to a $44,000 loss from the new purchase.  My estimated usage of the vehicle is 120 months.  This equals a much more reasonable $366 depreciation per month which is less than I’m paying to lease my Chevy Volt.  And, let’s be honest, leasing is pure depreciation.

OK.  These numbers really suck!  What can we do instead?

Let’s kill this car debt!

These three simple rules will provide financial security when buying vehicles (How to kill your car debt):

  1. Put cash in your cars and don’t borrow.
  2. Don’t purchase new.
  3. Purchase what you need without going overboard.

What Happens Next?  A Car Spending Forecast.

I’d like to break down scenarios on how I see our vehicle payments progressing over the next few years.  Projections can and will change, however, I feel it’s a good exercise and it will help us come up with our plan for FIRELet’s time travel!

How to kill your car debt.

September 2019

We’ve been making payments for another year on both our Chevy lease and our Ford loan.  The Chevy lease will have 9 more payments before lease end.  The Ford loan will have 15 more payments until loan end.  We’ll have $11,600 left on the value of the loan assuming we haven’t made any additional payments.  I’m actually going to wager that I will have received a bonus and applied it towards the vehicle loan to the tune of $3,000 which reduces the loan to $8,600 and has taken the payments left down to 11.  Bonuses are regular in my industry and they work well for targeted spending.  Loan end in sight.

We’ll have socked away another $2,000 by saving leftover salary or bonus as a vehicle purchase fund for my upcoming Chevy lease end.  We’re still making lease payments of $509 per month.  The vehicle purchase fund will be EASY to track in YNAB.

September 2020

That’s a really tough call for us and I guarantee I’ll have debated the different loan types a hundred times before making a decisions.

After saving an additional $1,000 in our vehicle purchase fund (total now $3,000) we purchase the Chevy Volt for the $18,000 residual price.  Let’s call it $19,500 after buy out fees and tax.  We’ll then have to finance $16,500 (I’d honestly love to be free of financing at this point, but without a huge bonus or lottery win I don’t see it happening).  But that’s OK.  Keep on Carrying on.  Options for the financing will have been 36 months (the highest I’d go) at $502 per month (assuming a future interest rate of 6%) or 24 months at $732 per month.  I will have selected the 36-month loan to free up cash flow in an emergency, with the intent of paying it off much quicker.  That’s a really tough call for us and I guarantee I’ll have debated the different loan types a hundred times before making a decision.

Wait what did you say???

The Ford loan is done!  We made the last payment in August of 2020 thanks to the bonus money thrown at it in 2019.

Now that I’ve freed up that $ 797-month payment in our budget I’ll throw $500 of that towards the new Chevy loan.

The $16,500 loan taken out in July of 2020 to pay for the Chevy Volt was reduced to $15,500 by September due to payments.  I’ll also throw another $3,000 in bonus money towards the loan, because I’ll likely receive the bonus, and debt sucks.  So I have $12,500 to go.

I’ve freed up $300 in cash flow at this point each month to start putting towards other goals.  Remember, I started at $1,300 going out.  Awesome right?  Wait until next year!

Cashflow is beautiful

September 2021

Three years from the point we formulated this plan and we are finally starting to make headway.

We’ve been paying off $1,000 per month towards the $12,500 owed and we’ll make the final car payment in October of 2021.  At that point, we’ll have $1,000 freed up each month and two fully owned vehicles.

I expect the Chevy with approximately 70,000 miles on it to have a value of $13,000.  The vehicle will be 4.5 years old.

I expect the Ford with approximately 75,000 miles to have a value of $24,000.  The vehicle will be just shy of 5 years old.

And then what?

We are likely to replace Erica’s Explorer with another three year old equivalent of a new $52,000 car in 2026.  This might be a Honda Pilot, another Ford Explorer or the newish Tesla X Max Plus.

Now we are going to drive them until they are 10 years old at which point we will replace them.  They are tools, not loved ones, remember?

We are likely to replace Erica’s Explorer with another three-year-old equivalent of a new $52,000 car in 2026.  This might be a Honda Pilot, another Ford Explorer or the newish Tesla X Max Plus.

and?

Let’s assume I can purchase this car for 40% less than new MSRP and it’s now a $31,200 car.  The value of the 2017 we’ll get at trade-in is $8,000 for demonstrative purposes.  So we’ll have 5 years to make headway on $23,200 in savings. Erica and I will need to save $386 per month to save this amount and be able to pay cash for a $31,200 car.  Do you see that this number is becoming very close to the depreciation number I came up with above?

The 10-year-old Volt is likely to be worth next to nothing at trade-in because of fear of battery degradation.  Let’s assume we can get $2,000 for a trade in.  I’ll shoot for buying a 3-year-old equivalent of a $40,000 new car as a replacement for my daily commuter vehicle.  The cost of this car will be $24,000 (same 40% discount).  I’ll need to save $333 per month over 66 months to pay cash for this new car.

Notice that I’m not looking at inflation of car costs or interest on my money.  This is done to keep the equations less complex.  These things will certainly be factors.

Where does that leave us in 8 years from today?

In 8 years we’ll have $23,200 in savings for a new Explorer replacement and $22,000 in savings for a new Volt replacement.  Yes, that’s right, we’ll have $55,200 saved up to go along with our trade-ins for 2 new car purchases in CASH.

How to kill your car debt.

But also we’ll only be spending $719 per month to save this money.  And then in 8 years after those new cash cars are purchased we’ll likely only need to be saving $550 a month to do the same thing in 7 more years (remember we’ve purchased 3-year-old cars).

But I don’t want to wait 7-10 years to get a new car!

The beauty of this is, when you’ve built up the cash investment in your vehicles and are not purchasing new vehicles, you can sell a car and buy another with a minimal loss in value.

Let’s say 8 years from now I want to trade our car in for 2026’s version of the Pontiac Aztec.  A couple years later I realize that camping in the back of your car is not all it’s meant to be and want to get rid of the car.  Seriously?  Tent Car?  We can sell the Aztec for the depreciated price and put the money in a new vehicle.

We’ll lose some in the sale and purchase assuming I’m trading in and buying from a dealer.  Then we’ll lose some more in sales tax on the new car purchase price (minus the trade-in).  It wouldn’t be the financial end of the world!  We’d end up with $3-4,000 in a loss in value most likely.  You could make this trade every two years and still end up way ahead of the person who purchases two new cars!

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One more time?  How to kill your car debt.

  1. Put cash in your cars and don’t borrow.
  2. Don’t purchase new.
  3. Purchase what you need without going overboard.

I’ll check back in next year!

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7 thoughts on “how to kill your $40,000 car debt in 3 easy steps”

  1. That is an interesting way to look at it. I’m driving my hoopty til the wheels fall off and/or until I can pay cash for a gently used Subaru Crosstrek.

  2. I often wonder what the cost of vehicles today would be for performance alone, minus all the creature comforts.

    Incidentally, my car is a 2009 Cobalt. I bought it new for under 12k, because it has manual windows and door locks. If I had it to do again, I’d have gone used for taxes and insurance purposes.

    But I also know financial decisions are often about more than just the math!

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  4. Hi Stephen

    Thanks for the interesting read about your current automotive expenses.

    I too went through a revelation when my wife and I were driving almost new vehicles and the payments were a major burden on our finances! We realized that we could not afford to drive newer vehicles and eventually had to sell them and buy ones that were approx 7-8 years old.

    This was by far one of the best financial decisions we have ever made. We spent a little more than we wanted to on our current used vehicles, but that decision has paid of in spades as we have had well over 2 years of issue-free driving.

    Thanks again for the interesting read! Good luck in all your future vehicle endeavours!

    Mike
    Mike recently posted…Polishing Compound vs Rubbing CompoundMy Profile

    1. Thanks for stopping by Mike!

      Luckily we have almost $15,000 in equity in the Explorer so if we needed to make that trade we certainly could. But I think I’d rather drive it until the wheels fall off! The beautiful thing about paying cash for the next one is

      If the Volt had been a loan and not a lease I may have made that decision.

      Stephen

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