A '$1,000 Challenge' Bonus: How to Buy a Car and Save a Bundle

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In the third installment of our budget-cutting series, The $1,000 Challenge, we focused on how to cut your transportation costs. But car buying deserves a column all its own.

Last year, nearly two-thirds of all car buyers financed their purchases with loans that ran from five to as long as seven years. To get a feel for just how long a seven-year car loan is, if you bought a new car when President Obama was inaugurated, you're still making payments and won't be finished for another two years.

The most obvious danger with a long-term auto loan is that you're paying a lot of interest -- more than 75 percent more on an 84-month loan than on a 48-month loan. Another issue is that you can start facing the costs of major repairs and maintenance on your car while you're still paying it off. And you'll spend a lot more time owing more on your car than it's worth, which could leave you stuck paying the difference if your car is totaled in a crash.

The best way to keep a car payment from crashing your budget is to keep your monthly payments affordable (which, admittedly, is why some people fall into those 7-year loans). The two usual tips for how to get around that problem are to save more for your down payment, or to spend less on your vehicle. This strategy accomplishes both. The idea is to purchase a car that you can pay off in three years, then set aside what you had been spending on your car payment as you drive the vehicle as long as you can.

Do that twice, and you'll have lots of cash to put down on a car the third time around.

For example, on a three-year loan, a $400 payment at 3 percent means you can finance $13,750 for a car today. That's probably a 2007 model, which you'll drive for five years. It's paid off after three, but you keep setting aside the "payment" in savings for two more, socking away $9,600 toward a replacement. By then interest rates will probably have increased, so let's say you finance the second car at 7 percent for three years, borrowing $13,000. Add your $9,600 in savings and that's $22,600 to spend -- and you're putting 42 percent down in cash.

More money means a better car, so let's say that gives you seven good years to drive it -- and four during which you save your "car payment" after paying it off. By the time you retire this car, you've saved $19,200, allowing you to paying well more than half the cost of your new car in cash -- or the full cost of a good used car -- plus you've kept your payment steady at $400 for the last 12 years.

If you can drive your cars longer before it's time to buy replacements, you can accumulate even more in savings and get to the point of buying a car for all cash sooner. (Tip: You can really stretch your automotive dollars by purchasing well-cared-for, two-year-old used vehicles instead of new ones. You'll find a good selection of those models coming off leases, often with the remainder of their warranties or certified by the dealer.)'

Plus, I haven't factored in any additional cash or reduced payment you'll get on your trade-in, since that will vary according to how well you take care of the car and whether you drive that puppy straight into the ground.

Sure, sometimes you have to put up with costly repairs, or driving with a noisy muffler until you can get to a mechanic, but the savings should make that sound like music to your ears.

Beyond the cost of your vehicle, there are plenty of other ways to save on your transportation costs. Check out those tips here, and the rest of The $1,000 Challenge here.

Here's the running total cost savings for the whole series so far:
  • Week 1 - Miscellaneous Spending: $132.89
  • Week 2 - Utilities and Phones: $139.39
  • Week 3 - Transportation Costs: $41.61
  • Total Monthly Savings: $313.89

Read them in any order you want -- just get in there and start saving! Check out the series introduction to get the big picture on finding big savings in your family budget.

Come back Tuesday when I'll tackle the bouncing baby bills of kid costs. You can check here on DailyFinance.com, follow me on Twitter, or go like The $1,000 Challenge Facebook page to get a heads up whenever a new installment comes online.

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18 Comments

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alfredschrader

Saving a dollar ? It's what I live for. Here's another tip: It's Superbowl time so chicken wings are $3.29 a pound (Beef Ribs are $2.99 a pound and whole chickens are 89 cents a pound).
Skip the scrawny winglets and buy small whole chickens. Cut them into eight pieces each freezing the backs for soup later. Then cook and drench the chicken pieces in your wingsauce. Serve. Result is meatier and leaves money to buy more beer.

If you buy the Beef Ribs have your butcher saw them in half downt the middle. When you get it home cut them into pieces which results in Beef Shortribs regular price $6.99 a pound.
Brown and slow cook them in Beef Stock with carrots, onions, and a dash of wine.

January 27 2014 at 7:06 AM Report abuse rate up rate down Reply
htxxjr

Once i paid off my mortgage,I still paid my morygage in my account. 55o.oo a month. For 6 years.
Do the math.

January 27 2014 at 1:01 AM Report abuse rate up rate down Reply
Wiley

do the math anyway you wish or can and the answer will always be the same -
you can never have a new car except for a few minutes -----
you can never have a new anything except for a few minutes -
NOW Mr O can always have NEW BULLSHIT ---

January 26 2014 at 10:56 PM Report abuse rate up rate down Reply
tmspitrow

I BOUGHT A LEXUS ES 300,10 YEARS AGO AND STILL GOING STRONG.
HAVE ONLY SPENT MONEY ON NORMAL MAINTANCE.
NO CAR REPAIR BILLS
I PLAN ON KEEPING IT ANOTHER TEN YEARS,IF I LIVE THAT LONG.
I BELEIVE YOU GET WHAT YOU PAY FOR.

January 26 2014 at 6:34 PM Report abuse rate up rate down Reply
jpfmtka

Another worthless article from Daily Finance. Buy a used car that has depreciated, drive it conservatively, attend to proper maintenance and drive it until it has no further life.

January 26 2014 at 12:00 PM Report abuse +2 rate up rate down Reply
ED

I didn't read one word in this column pertaining to the value of the vehicle compared to how much you owe on it. If you get upside down with the financing, you never get ahead. You put a lot of cash into it up front, you get upside down really quick. You finance for too long, you get upside down really quick. Probably the best advice? Don't finance what you can't afford. I used to sell new cars, and I can assure you those folks selling them have more ways to con you out of money than you know exist. If you HAVE to finance, I would advise have your financing approved before you go to a dealer, preferably through a credit union, and secondly, buy something 2-3 years old with low mileage, so most of the initial depreacion has been reduced.

January 26 2014 at 9:32 AM Report abuse +1 rate up rate down Reply
1 reply to ED's comment
Brian O'Connor

Ed, you must have missed these words, then: "you'll spend a lot more time owing more on your car than it's worth, which could leave you stuck paying the difference if your car is totaled in a crash."

Thanks for reading!

January 26 2014 at 12:48 PM Report abuse rate up rate down Reply
MR NUSSBAUM

I used a similar method but keep the cars around 13 yrs. Thus I pay cash for all new cars.
400 dollars a month? who the heck wants to spend that plus gas insurance and maintaining the car it is a lot of money. Save the money slowly over a long period of time. and you wont have to finance anything ........

January 25 2014 at 10:18 AM Report abuse +4 rate up rate down Reply
1 reply to MR NUSSBAUM's comment
vlady1000

I know a guy that has lost an avg of $2,400/mo, for the last 18 months on depreciation and sales tax alone. no loan interest, gas, plates, insurance, etc!!! And that is on just his Dailey driver, does not include wife's, kid's, etc cars. He has just bought his 3rd new car in the last 18 months (yes, a new one every 6 months), all over $65K each. I do not care how much $$ you have, that is just plain stupid.

January 25 2014 at 6:04 PM Report abuse +2 rate up rate down Reply
2 replies to vlady1000's comment
xraybrain

People who make a lot of money seem to spend like the gravy train will go on forever.
People can get an illness or lose their job in the blink of an eye. The time to be packing away the savings is in the good times. One shouldn't wait for a disaster to hit and then start thinking about cutting back.

January 25 2014 at 8:59 PM Report abuse +4 rate up rate down
vlady1000

Xraybrain, I know. The worst part, it is the family owned company (been in business 50 years) has been loosing money the last 4-5 years and have had 80% layoff rate, remaining employees have taken pay cuts, benefits reduced, etc and they see this. A real good way to gain trust and motivated employees.

January 26 2014 at 2:38 AM Report abuse +2 rate up rate down
John

I have averaged under $ 1000 / year for the last 45 years including purchase price , maint. and repairs but I drive them till they are at least 20 years old and buy 3-4 year old cars cash.

January 25 2014 at 1:07 AM Report abuse +2 rate up rate down Reply
betty_brock

When we shopped around for a new car, we found a $4,000 difference in what the different dealers offered for our trade in.

January 24 2014 at 9:18 PM Report abuse rate up rate down Reply
vlady1000

Buy a good used car, cash, spend $40 for a repair manual, carry only PL/PD (no collision or theft) insurance. keep it until it dies, donate it to a charity.

January 24 2014 at 7:00 PM Report abuse +3 rate up rate down Reply
2 replies to vlady1000's comment
xraybrain

that's what I do. I am 60 years old and have never purchased a new car. I buy used cars and pay cash. I only get rid of a car when the rust is so bad a it won't pass inspection

January 25 2014 at 9:02 PM Report abuse +3 rate up rate down Reply
2 replies to xraybrain's comment
vlady1000

LOL, a Flintstones car at the end. Been there done that.
I need a truck (own many student rentals) but my wife drives older classics (drivers, not show cars). Cheap to repair (I can do it), they usually appreciate (not depreciate) and she gets a lot of Thumbs up (even from the cops). Gas mileage is less than the new cars, but she drives only about 6K/year so we make up for that, plus some, in no depreciation (maybe appreciation), etc.

January 26 2014 at 2:49 AM Report abuse +2 rate up rate down
Wiley

so you qualified for Mr O"s cash for clunkers huh ?? HA!

January 26 2014 at 11:06 PM Report abuse -1 rate up rate down
Wiley

and always be plagued with a car that won"t run huh ----

January 26 2014 at 11:00 PM Report abuse -1 rate up rate down Reply