I wanted to produce a short step by step guide to getting from where you are today to your first cash car. This list is to be a short informative and to help you get started. It is not meant to be a full blown step by step guide. I have written previous blog posts or spoken on my podcast about much of this in greater detail. What I hadn’t done until now was lay it all out in one place.
I hope you will find this useful.
1. What is it costing you long term to have auto debt?
This first step is a key to helping you know why you should be driving in a car purchased with cash. Most people caring auto debt have no idea the long term damage it is doing to their life.
This is a simple exercise get a calculator and multiply your current car payment over 40 years. The equation would be payment times 12 months times 40 years.
Here is an sample calculation using a $474 per month payment.
474 X 12 X 40 = $227,520
You should be aware this number doesn’t include the rising cost of cars and how the payment would likely go up over time. It also doesn’t include the additional growth that would come from the compounding of this money. Lastly, it also doesn’t include the cost of depreciation which is a huge part of the equation.
2. What is the balance on your current auto debt?
Now that you know the long term damage you are doing to your future, let’s find out what your current loan balance is. It is my experience that people making car payments focus on the payment and not so much on how much they owe on their current car.
To get this balance, contact your lender and request your current loan balance. This is a different number than the payoff balance, which you would use if you were selling your car today. It will get you a good number you can work with in the next step.
3. What is your car worth?
Now that you know how much your current loan balance is, let’s see how much your car is worth. Now this exercise is a little subjective, meaning it will be subject to your opinion about the condition of your car.
What you will need to do is four things.
- Get your car’s value on kbb.com for a private party sale.
- Get your car’s value on edmunds.com for a private party sale.
- Search for car’s like your’s ion autotrader.com and see what they are selling for.
- Search for car’s like your’s on craigslist.org and see what they are selling for.
To Get an accurate picture of your car’s value on any of these sites, you will need to know the year, make, model, features, and mileage of your car. For instance, 2003 Accord EX with leather seats, moonroof, and 140,000 miles. Next you will have to determine the overall shape of your car. Is it in perfect condition? Is it clean condition? Is it in moderate condition? Is it in fair condition? This will be critical to determining your car’s value accurately.
When using Autotrader and Craigslist, it is important to note the more local your search the more relevant the value of the cars returned will be.
Once you have numbers from all of these sources take a look at them. How close are together are the prices? Is one source much higher or lower? If there are enough cars for sale in your area, I would use Autotrader and Craiglist as a better source for the value of your car. There aren’t always good representative samples locally that match your car’s specifics.
Once you know what your car is worth, you can then compare it to your loan value and see where you stand.
If your car is worth more than your current loan value, congratulations you have equity in your car. Meaning it is worth more than you owe on it.
If your car is worth less than your current loan value. You have no equity in your car and your car is worth less its value. This just means to sell your car, you need to have extra cash on hand to pay off your loan. You can sometimes do this by taking out a personal loan for the difference. Not ideal, but better than making high payments while your car depreciates.
4. What type of car do you need? (sedan, coupe, minivan, truck, etc.)
You now know the damage you are doing to your future and how much money you do or don’t have tied up in a car. The next step is to determine what car you would like to buy for cash.
This step is important because you want your car purchase to last you while you are paying off other debt you may have. You have to get the right car to fit your current lifestyle situation.
If you are single maybe a small compact car would be a good choice. This may also be a good option is you have to do a lot of driving. It would be easy on gas and car maintenance would typically run a little cheeper.
If you have a family with several kids, a minivan is a nice option to have room to accommodate everyone comfortably.
If you work in construction a truck may be in order to haul equipment and materials.
The point is to make sure you are buying a car to reliably get you from point A to point B. The one that best fits your current life circumstances and driving requirements.
5. Start saving, working another job, or selling things to come up with $2,500 to $5,000 for your cash car.
Are you ready to buy a car for cash? If so, you need to have the cash. How are you going to get it.
The good news is you can find a good safe reliable car for much less than you probably think. I think a $2,500 to $5,000 car can service most people’s lifestyle.
How can you get the money?
Do you have any extravagancies you could dial back? How often do you go to Starbucks? How much is your cell phone bill? How much is your cable bill? How often do you eat out? People spend what more on these types of things than they realize. Be creative. Look for ways to cut back.
Sell stuff. Rather than paying for a storage unit sell stuff you aren’t using anymore. Wild concept, right? We all have things around our house that we can sell. Stuff we don’t use and wouldn’t miss.
Find a second job for a short period of time to help raise the cash necessary to buy a car. The second job can be something as simple as mowing lawns, delivering pizzas, or painting houses. None of these take a lot of expensive equipment, but can deliver additional funds into your household. It is all about doing a little extra now to bring big benefits in the future.
6. Do your research. (quality, pricing, and total cost of ownership)
What I mean here is don’t just focus on purchase price.
The quality of a car is a big deal! Make sure you have reviewed a car’s reliability on Consumer Reports, Edmunds, and KBB at a minimum.
Using AutoTrader, Craigslist, Edmunds, and KBB research the expected price of cars you are interested in buying. Be sure to include the mileage, features you are interested in, and the condition to get the most accurate pricing. As I stated earlier, I would lend more credibility to local car pricing in AutoTrader and Craigslist than other sources.
It doesn’t matter if you can buy a great Mercedes for $5,000 if it cost you thousands per year in repair and maintenance. Likewise a great deal on a truck or SUV won’t matter is the gas mileage is so back it costs you hundreds a month in gasoline.
Both KBB and Edmunds have cost to own information. This is a great way to gauge the total cost to own the car you are interested in buying. This will help you understand when you have a good fit with your on going budget and not just with the purchase price.
7. Start your car search.
Now you have determine the make, model, and year range of cars you are interested in buying.
You are now ready to go to Craigslist and AutoTrader to search for you next car. Be sure and specify features that are deal breakers for you. Want a car to have a moon roof? Search for cars that have that feature.
8. Qualify the seller by phone.
Before you go look at a vehicle, find out from the seller if this is a car you would be interested in spending your time on.
Your goal here is as much to disqualify buyers and cars you aren’t interested in pursuing.
I recommend buying from a private seller. If someone is posing as a private seller, but is really a dealer. Walk away. How do you know? Ask how long they have owned the vehicle and why they are selling. This will usually help you identify a seller true disposition.
You can also quickly disqualify cars that haven’t been well maintained by asking questions about age of tires, most recent oil change, and frequency of oil changes. You can follow up by asking if they have records to show repairs and maintenance on the car.
Do these few things can help eliminate a great many sellers and cars.
9. On-site inspection of selected car(s).
The seller and car has passed your initial questions. You are now ready to make an on-site inspection.
Now, you want to inspect the car to make sure it is something your family can count on.
First, walk around the outside and look for obvious issues. Paint issues, body panels not fitting properly, and condition of tires and wheels.
Next check the engine. You will look for fluid leaks, checking fluid levels, fluid cleanliness, and condition of belts. Is the engine too clean? If so, the owner may be hiding a leak.
I would then check out the interior, first looking for any obvious rips or tears in seats or roof. Check all electronics to make sure they work. Lights inside and out, radio/CD, AC/heater, and all locks, windows, and electric seats. Is the interior clean?
Finally, check the trunk to make sure there is a spare tire and it is properly inflated. Is the jack present? Is the trunk clean?
You are now ready for a test drive to make sure the car runs as well as it looks. Key items acceleration, transmission shifting smoothly, and smooth comfortable ride.
10. Get the car inspected by a local mechanic.
Now that you found a car that meets your expectations and passed your critical eye, your work is almost done. Don’t stop now. Have the car inspected by an experienced mechanic.
This is a critical step to give you peace of mind and make sure you are getting the best car for you investment. Doing this one thing can help prevent making a costly mistake in your car buying decision.
If you don’t have a mechanic you use today, ask friends and family if they have a mechanic they know, like, and trust. Once you find one, take the car in and get the results.
11. Buy your cash car.
You are now ready to buy the car you have researched, found, inspected, and had a mechanic inspected.
The only thing left is the price.
Negotiate with the seller an agreed price. Then do all the necessary paperwork for your state or local government entity.
Note, there will be tax due in most instances, check with you local government entity for details.
Note: You may be able to get a lower price just because you are offering cash.
12. Ready your existing car to sell fast.
The best way to sell your car fast is to make it a car you yourself would want to buy.
Make sure it is mechanically sound. Clean and neat inside and out. All records collected. Make sure tires are in good shape. Make sure all maintenance and fluid changes are up to date. All registrations and inspections (if required) are current. If they are close to expiring get them renewed.
13. Sell your existing car.
You’ve done the hard part already. You know what your car is worth. You have made it ready to sell. Now it is time to sell. It may be tempting to trade your car in and avoid the hassle of selling yourself, but you will be leaving money on the table. Selling your own car will make you hundreds to thousands more dollars over trading.
14. Start paying yourself your old car payment.
You’ve got the cash car, you’ve sold your debt laden car. Now what?
Take the car payments you have been making to someone else and pay yourself. Doesn’t that sound good?
You can now take your car payments and save them for potential repairs on your current cash car, for your next cash car, to pay down other debts, invest more into your retirement, start your child’s education fund, or something else important to you and your family.
In conclusion, as I stated in the opening, this was not meant to be an exhaustive list, but rather a framework to help people know where to start and how to progress. This will lead you to your first cash car. There is more information about many of these topics either on my blog or my podcast. I would encourage you to check them out.
Lastly, I will be publishing a Kindle book soon that will go in much more depth on these topics. The title is The Cash Car Solution: How to Escape Debt, Drive for Less, and Invest in Yourself.
Please let me know where you are in the cash car buying process. Let me know how I can help.