Why You Should Never Finance a Car

It is typical in America to finance your car, and that shows no signs of changing. In fact, a report from Experian shows that outstanding auto debt has doubled from $677 billion in 2010 to $1.37 trillion in 2020. The average auto loan balance in 2020 was $19,865, and everyone from Zoomers to Boomers are taking on more debt every year to pay for their cars.

You should NEVER finance a car.

This is one of the biggest obstacles to middle-class Americans building wealth and being able to live without being controlled by money. It’s common to think that you couldn’t otherwise afford a car without financing one, but this is a myth.

Here’s why you should never finance a car, and how you can have the transportation you need while also building wealth.


First of all, if you have to finance a car, it means you really can’t afford it. Being able to truly afford something does not mean you can make the payments, it means you can make the  without jeopardizing your financial security.

3 Reasons Financing a Car Jeopardizes Your Financial Security

1.) You are spending extra money on interest

The national average for auto loan interest rates in the US is 5.27% for a 60-month term. For the average outstanding balance of $19,865, this would amount to $2,775.36 paid in just interest for that 60-month car loan.

2.) Maintenance and repairs can put you further into debt

If you finance a car, you have to make monthly payments to keep the car (obviously). More money flowing out of your monthly budget means less money being saved. So, what happens if the car needs repairs, or new tires? As I’ve mentioned before, only 39% of Americans could cover an unexpected $1,000 expense. That means up to 61% of people are going to turn to their credit card to cover this vehicle maintenance.

3.) You will get stuck in a trap of always needing to finance a car

If you finance your next car, you’re probably going to have to finance the one after that. And the one after that, and the one after that…

You’ll be spending money every month to pay off the loan, which means you’re not able to save as much. When it comes time to replace your car, you won’t have savings, so you’ll need to finance a car again.

Breaking the Cycle

“But I need to get to work!”

Reliable transportation is a must, so it can be hard to break out of the aforementioned trap. Here are some alternatives to help you break the cycle:

  • Public Transportation
    • The US is not known for having widely available public transportation. If you live in a big city, you will probably have better options. Though, a lot of small- to mid-sized towns at least have a bus system these days.
    • Look up public transportation options in your local area. If the routes you need aren’t covered completely, walking or biking can make up the difference. This is good for the environment, good for your health, and good for your wallet, so it’s a win-win-win!
  • Carpooling
    • If you live near friends or co-workers you can carpool. Even if you chip in for gas or buy them lunch as a thank-you, you can save more money towards the car you will soon purchase.
  • Ride share
    • There are plenty of ride share options available these days. Of course, these aren’t the most affordable option, but with the average car payment of $563 you could take two $25 rides every week and still be saving $363 per month towards your future car.

You can use any combination of the 3 above options until you’ve saved up enough for a more affordable vehicle, such as an older car, motorcycle, or moped. If you can save $300 per month for a year, this would amount to $3,600, which would be enough to get you a reliable, used car.

If you want to upgrade, you can continue saving while driving an older car, but you can also keep what you got. It only needs to get you from point A to point B. I bought a used car (which was actually pretty nice!) for $4,500 and I still have it 11 years later. 

If, and ONLY if, the alternatives mentioned above aren’t available to you and you really need a car right now, try a slightly different approach so you don’t get stuck in the trap of always needing a car loan.

  1. Determine the car payment you could afford.
  2. Divide this amount by 2 and find a cheaper car. For example, if you can afford a maximum payment of $400/month, find a car for $200/month.
  3. Save the difference ($200/month).

That way, when you eventually need to replace the vehicle, you have some savings and you can break out of the cycle of always needing a car loan.

You CAN Get Ahead

If you are financing a car, this means you really can’t afford it, and you’re jeopardizing your financial security. Financial Liberty takes time and sacrifice. I biked 10 miles to work everyday while saving up the $4,500 for my first car. Perseverance pays off. You can start today to break the cycle, and stop being controlled by money.

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