Saturday, 11 April 2015

Car Payments A Boon Or Bane

Like they say, think before you leap. The same goes with car payments. Be very careful while taking this important decision.

Most of us swear that we will make our car payments on time. But, most of us take the car payments as a burden and woe in life, and paying it is not a big deal. The big question is that is the car payments, so important that they have become the way of life? Any normal person will think this way only, and for him the car payments will become part and parcel of life. If you find someone who does not have car payments to make, then you may call him weird, because weird people do not have to make car payments.

Car Payment Advice

According to the latest statistics, among the total number of car buyers, at least one third of them opt for a six year tenure to repay their car loan. The average rate of interest applicable in such cases is about 9.6 %. Most of the people opt for a car in the price range of $26000. So the cars that you see in the parking lots, and on the road, they make a monthly car payment of $475. One very important point that you should remember before purchasing your dream car is that as soon as you drive your car out of the showroom, the price of the car goes down by 25%. After about 4 years, the price of your car goes down by about 70 %. So the meaning of this is that after 6 years, the car payment you have made for your $26000 car is $33000, but now the value of your car is just $ 6000. So, you can see that it is not a good deal at all.  

Now you can assume another scenario, where you have purchased an old car at $2000, and will use it for supposing 10 months only. Now in the first instance the monthly installment of $ 475 that you were paying to the bank to repay your loan, that money you save for purchasing a new car. Instead of giving it to the bank, if you save so much cash you can purchase a new car without taking any loan.
So after 10 months, you have saved $ 4750, and when you sell your old car you can expect to get another $1500 to $2000. So all together you will easily have with you $ 6000 in cash. So, you can see that you can have a big upgrade in this manner, and that too without paying anything to the bank. If you want to use the old car for another 10 months, then you will add up another $4750 in your cash fund, and you will probably get the same price that you were getting 10 months earlier. So after 20 months you have a cash reserve of $ 11,000. You can see that you have built on so much cash just within 20 months of the starting of the whole project.

So, the conclusion that you can draw from these two instances are that if you are not paying $475 every month, then you can use it just the way that you want to. If you want to build in on your cash reserve, then you can probably invest the $475 in some mutual fund. If the rate of interest is 12% every year, then in 10 years, your fund will grow up to a plump $ 100,000. In 20 years, you would have probably accumulated $ 470,000, and in 30 years you will have a mutual fund that will be over $ 1.6 million.

These numbers might be giving you a dizzy feeling. But this is the truth. You can calculate it yourself, as it involves simple mathematical calculations. The rule of the thumb is that if you save on the car payments that you make, then you can use that fund on many important things like the education of your child, any other debt repayment, saving for your retirement, and so many other things. If you follow this easy plan, that has been described above, then after 10 years your financial condition will change dramatically. So now the important point to ponder about is that whether you can survive without making car payments or not. 
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