The typical car payment in America today is about $667 per month.
What’s most insane about this number is, that’s actually more than my sister (who is in her 30’s now) paid for one of her first apartments per month.
I think she was paying somewhere around 500-600 for a pretty decent 2BR. Granted, this was like 10 years ago–but good God people–almost 700 bucks per month is pretty insane.
Given that the median household income is about $70000–that puts just the car payment alone (not counting maintenance) at somewhere around 11% of the gross income of a typical US family.
After accounting for taxes and withholdings–that percentage looks even worse.
When I finished with car payments back in 2020, I had a payment of around $220-230 or so per month for my well-used Acura.
I know when I freed up that extra cashflow every month–I felt richer–even though I only owed about $2000 or so when I finally paid it all off.
Imagine how much richer the typical American family would feel (and actually be) if they didn’t have to worry about trying to come up with almost $700 every single month for the car!
There’s a few really smart reasons that I can think of to get rid of the car payment if you’re in a position to do so:
Pay off the car – get a better house
All of those recurring monthly debt obligations make it harder for you to qualify for mortgage. The more monthly debt on your car, the less you can borrow on other items like a house–which actually goes up in value.
Free up that monthly cash flow by paying the car off and now you can qualify for a bigger mortgage payment (and actually have a shot at affording it).
Even though you might be “close” to paying off your car in a year or two, a lender won’t underwrite a deal giving you that benefit. If you pay it off, it comes off the books completely and lowers your “debt to income” ratio that lenders look at to determine how much of a home loan you can afford.
Lower Car Insurance Costs
When I owed money on my car, I had to make sure I had insurance to cover the replacement cost of the vehicle.
Once I paid it off, I could decide myself if I wanted to have insurance to cover the “value” of the car in case it ended up being a total loss.
Now that my car is worth somewhere in the neighborhood of 2-3 grand–I don’t bother with insuring the value of the car at all. If it get’s destroyed in an accident, It wasn’t worth anything to begin with any way.
Granted, I need and still carry the required insurance by state law, but it’s at a much lower cost now that the car is paid for.
So, paying off the car (at least in my case) allowed me to get a bit lower monthly insurance costs every month.
Paid off car makes selling the car a lot easier
If you end up deciding to sell the car, you’ll be able to have the title in hand–free and clear.
If you’re ever in a pinch and need the money, you’d be glad you could move quick and sell the car.
It’s nice to be the official owner and have the car officially count in the “positive” column for your net worth calculation (if you’re into that sort of stuff).
Once you pay off the car, it becomes and asset, and not a liability.
Save on future interest payments
Paying off the car early can help you save on the interest payments you’d otherwise have to make to the lender.
You’ll need to check to make sure there are no pre-payment penalties for paying it off early–but assuming there are none, you’ll save on interest.
Paying off high interest debt is a guaranteed return on your money–and even if your car loan has a low interest rate–it’s still something.
Benefits of paying off the car that aren’t logical
Most people make the logical “spreadsheet” arguments when it comes to debt. The most common response is “well, you can invest that same money a X% return, and you’ll be ahead of the game.”
This argument works great in a spreadsheet or compounding interest calculator. But in the real world, there’s another factor to consider:
When you have no debt, you can make different choices for your life.
If you’re stuck having to pay almost 700 bucks a month for a car, you’re not likely to take a chance with your career, change jobs, start a business, or otherwise put yourself in a spot that might pay off in the long run, but cost you some money in the short term.
In other words, you’ll be too busy paying bills to be able to take advantage of the opportunities that life will throw your way.
That’s what we call “opportunity cost” in investing. It’s real, and it’s the hidden loss in these debates–tucked away under the ocean of “what could have been” if “I didn’t need to worry about paying XYZ.”
So my friends, I paid my car off early.
It freed up cash flow for me instantly–right away that month.
Doing this will all of my debts (including a huge ~50K student loan) allowed me to live on practically no money–because I had zero debt.
Next thing I knew–I was able to stash a huge % of my take-home pay–and that’s when things really started to open up for me.
So–if paying of a car loan early is dumb–I guess I’m the biggest idiot on the internet!