August 14, 2007, 7:00 am

Paid off car: one more step to financial freedom!

by: The Financial Blogger    Category: Frugal
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What are your monthly payments? A mortgage or a rent, student loans, balances left here and there on credit cards, all kind of insurance payments and… the car loan/lease payment. Don’t you hate it? I do! Cars are getting so expensive (average price is now set around 35K) and you have so little time to pay it back (maximum financing option I have seen was 7 years… but look out the interest rate!). Cars are definitely a black hole in your wallet. With gas, insurance, maintenance costs added to your car payment, you are probably close to your mortgage payment!

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I am finally done with that! We recently paid our Mazda Protégé 5 earlier this year. We started by renting it for 4 years. It was definitely not the smartest idea. However, my wife and I were 20 and still at school. We would have never been approved for a car loan. There are reasons why it is so easy to get approve for a lease. First, the payments are lower when you lease. Therefore, your Total Debt Servicing Ration (TDSR) will be lower. Second, the car company still owns the vehicle. They can take it back anytime you are not making your payments. Procedures are a lot more complicated when you give the car as collateral for a loan. It is like going in a hospital in Quebec, you are going to wait until you die before you get what you need! The last point, but definitely not the least, it is more profitable for the company.

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For example, we rented this car for four years. The original cost was $23,500. My monthly payment was $331. So during this four years period, I paid a total of $15,888. At the end of my contract, we had the possibility to buy the car for $13,500, which we did. We bought the car for two reasons: the first one is because we liked it and never had any problems (knock on wood!). The second reason is because we would have to pay around $2,000 to bring it back. We exceeded the amount of kilometres/miles allowed and a kid in Montreal thought my car’s hood was a drive way and decided to take off the snow with a metal shovel. I do not need to explain that I would have to fix these 34 scratches before I return the car back!

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So then, we paid a total of $29,388 for this car, taxes included. If we would have bought the car over 60 months at 8%, the monthly payment would have been $476 per month. It is much more than the $331 but we would have paid a total of $28, 589. So it is almost a thousand dollar less even at 8%. Presently, you can find financing for 5% over 5 years with many car companies. The lesson behind all that: car companies are making more money with less risk by leasing their cars.

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Another good point of keeping your car for several years is that your insurance fees are decreasing accordingly with your car value and your driving behaviours. I started at $1,500 a year (imagine, I was a young guy with plenty of speed tickets!) and now I am down to $450 (25, married with two kids… quite a change isn’t it?).

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The tough part still remains. Now that we have no car payments and a low insurance cost, our cash flow has increase. We feel richer and pay for more luxury (like increasing our house size). However, as my car is a 2002, mechanicals problems might arise along with the envy of riding another brand new car. We are trying to put more money aside by increasing our Smith Manoeuvre payment. I calculated that if we can keep up with our Mazda another 2 years, we will be able to afford a nicer car with no big payments.

What are your monthly payments? A mortgage or a rent, student loans, balances left here and there on credit cards, all kind of insurance payments and the car loan/lease payment. Don’t you hate it?

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Comments

Hey FB, congrats on paying off the car, it’s always a big day 🙂

Of course, you do point of the big caveat: The tough part still remains. Now that we have no car payments and a low insurance cost, our cash flow has increase. For which I would personally start a “car savings fund”.

The short-term cost of the car will vary greatly, like the day when you pay it off. Of course, even though you feel $300/month richer you’re actually just on “borrowed time” b/c your 2002 is going to need $2,000 in the next 18 months: tires, belts, brake pads, suspension, etc. So your long-term cost hasn’t changed, it’s just lower for the moment.

If you can live without the $300/month. Why not put aside $250/month towards the next car and the repairs on this one (which is probably running out of warranty)? You’ll get an extra dinner every month and you’ll have money around when the car needs repairs.

At some point, the Mazda will give up the ghost or the repair bill will simply be too large. At that point you’ll be able to roll that money into the next car and get more car OR simply pay for less time.

by: The Financial Blogger | August 14th, 2007 (4:18 pm)

Hey Gates, you got that right!
In fact, I just put that 2K on my car two months ago (bearings, brakes, timing belt, etc). Man, that was a shock!
I definitely need to set up a car fund but I will not be able to do it this year as my wife will be on maternity leaves… 55% of her income, this just made a nice cut in my budget!
Hopefully the Mazda will survive another 5 years without too much cost. It would it 225K KM and I will be able to change it for a bmer 😎 … welll.. this is the plan 😉

Congrats FB! 😎 That is always a good feeling to have.

“We are trying to put more money aside by increasing our Smith Manoeuvre payment.”

Only a matter of time before that’s done too.

FB,
My wife quit working when our first 2 (twins) were born. We now have 4 kids, and I would like to have her extra paycheck, however she’d be working for almost minimum wage (we live in the US). I think I figured it out to be about $6.45/hr, compared to what she was making at the time ($15/hr). I arrived at her real hourly rate by subtracting off daycare, additional driving to/from work, etc.
We’re about to settle on our first rehab house, and if that goes slightly well, we’ll be making about the same amount in a shorter timeframe, and without having to juggle getting the kids to daycare, etc.

Congrats on getting the car not paid off! We only have 1 car loan left ($173/month). If all works out fairly decent, by the time the car is paid off, we’ll the additional funds necessary to keep our 2 cars running for 10-12 years (or more if we’re really lucky). And the whole time we will be building up savings to use for a replacement vehicle when it is necessary.

by: The Financial Blogger | August 16th, 2007 (3:20 pm)

Hi Chris,
This is very good that you and your wife were able to manage with 4 kids and only one salary. I would like to know how you managed your personal finance. We aim the same thing but I fear my wife would have to get back to work once her maternity leaves is over.

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