New cars are one of worst purchases that we can make due to rapid decrease in value, especially over first three years. When we finance these vehicles, this turns a bad situation even worse. We have now added a couple thousand dollars in interest to cost of a depreciating item.
Used cars are answer to avoiding this big hit in depreciation, but many people still finance used car. Let's take a look at how you can buy used vehicles even when you have very little to start with.
Let's assume you wanted to purchase a 2005 Accord for $20,990 and financed it for 6 years at 5.95%. The payment would be $341.85 per month for a total amount paid over life of loan of $24,613.40. That includes $3,623.40 in interest paid.
Since you had decided that you could afford $341.85 payment to finance company, we assume that you can afford to pay yourself $341.85 into a savings account.
We round off this savings and do not account for any interest and assume that you save $4,000 each year. We will also assume that you can drive your current jalopy for one more year while you save this money.
January 2006 you now have $4,000 saved and can afford to buy a 1992 Honda Accord.
January 2007 you can sell 1992 for $1,400, add another $4,000 to it and buy a 1995 Honda Accord.
January 2008 you can sell 1995 for $2,000, add another $4,000 to it and buy a 1997 Honda Accord.
January 2009 you can sell 1997 for $2,300, add another $4,000 to it and buy a 1999 Honda Accord.
January 2010 you can sell 1999 for $2,600, add another $4,000 to it and buy a 2000 Honda Accord.
In January 2011 you have reached value of used car purchases where selling 2000 and adding $4,000 to it will not substantially upgrade your car, so you continue to save.
January 2012 you can sell 2000 for $2,400, add $8,000 (two years of savings) to it and buy a 2006 Honda Accord.