A Case for the Debt-Free Car

I know a lot of people who have good jobs, but really old cars. To try and get to the bottom of this I asked a friend of mine, who was an unabashed member of this group, why he held on to his aging vehicle. His reply was “It still runs and I don’t need another monthly bill”. Now I love cars, but as I get older and get closer to home ownership and hopefully fatherhood I am begin to understand this way of thinking. The debt free car is very appealing.  I decided to dig down and take a closer look at the numbers.

For this exercise we will pretend that you are buying one of two cars today. The first car is a new car, right off the showroom floor, and it costs $25,000. This seems like a nice midrange for most of the car buying public, sure you can find cars for well over $30k and a good amount for $15k. carFor this demonstration we are going with $25k, which would either be the base model of a higher end car, or an economy car packed with options. For the other car, the debt free car, we are going pick an imaginary car with under 125,000 miles and in good running order. Such a car might take some effort to find, but I believe that it is entirely possible. We are going to plot out 5 years of ownership, taking into account maintenance and general wear and tear. We will assume that you drive 12,000 miles a year, the average for an American motorist. You will also have $6000.00 to put down. 

The New Car: After taxes, title ,and license the grand total for you new ride is $28,000.00. Your down payment knocks it down to $22k and you get a low interest five year loan for the rest. Your new car payment will be $400 a month. You give the dealer a check and he/she hands you the keys. 

The Debt Free Car: You search and search and finally find a good condition used car, a 2008 with 120,000 miles on it. You bring your uncle the mechanic over, he takes a look, and he gives it the thumbs up. You haggle with the dealer on the used car lot and you settle on $6000.00. You fill out some paper work, hand him a check, he hands you the keys, you cross your fingers and drive off in your “new” used car. 


Year 1 – 

  • The New Car – Things are going well, as time passes you can still make out the faint scent of new car smell. As the first year ends you have paid out $4800.00 in car payments.
  • The Debt Free Car – You’re doing fine also, you research is serving you well and you haven’t had any mechanical problems. Cost to you this year $0

Year 2 – 

  • The New Car – Still going strong, anything that pops up has been covered under warranty. You pay another $4800.00 in car payments.
  • The Debt Free Car – You year was a little more expensive than last. When you went in for inspection you were told you needed new brakes and tires, you are out $1000.00

Year 3 – 

  • The New Car – Status quo, another $4800.00 in loan payments.
  • The Debt Free Car – You heard a banging sound when you drove to work, major repairs to your transmission cost you $2000.00

Year 4

  • The New Car – Needs tires and brakes = $1000 and $4800.00 in car payments. 
  • The Debt Free Car – Needs and new battery and upon the advice of your mechanic you pay for some preventative maintenance, you pay another $600.00

Year 5

  • The New Car – Is no longer that new, a few small repairs pop up for $600 and you pay you last year of payments $4800.00 Congratulations you now officially own your car!
  • The Used Car – Now has over 170,000 miles on it. The alternator goes you are out $400.00 You decided it time to move on and sell it to a high school kid for $1000.00 

After 5 years where do we stand?

  • The New Car Owner: Has paid out: $25, 600 during this time period.
  • The Debt Free Car Owner: Has paid out $4000.00 and has $1000.00 towards his/her next vehicle. 

*I am not counting items like oil changes and inspections since new and used cars a like have to go through these types of service.

The “New Car Owner” has spent $21,600 more than the “Debt Free Car Owner” in that same period. What would you do with an extra $21k? Pay off student loans, or credit card bills? Put a new kitchen in your house? Save for college for your kids? Start a small business? 

On the other hand the “New Car Owner” has now become the “Debt Free Car Owner” and if they have taken good care of their car along the way they can expect a smiliar if not even better out come and can use that car debt free for another 5-7 years. The “Debt Free Car Owner” has to buy another car.

When I step back and look at the numbers I am pretty surprised, $20,000.00. That is a lot of money and as I look towards the future I can think of many things I could do with that money. Perhaps my next vehicle will be a debt free car.

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