I know for some people a car payment is a part of your budget that seems very normal, but in reality it’s a budget item that doesn’t need to exist.

That brand new car comes with a pricey monthly payment, but also has hidden costs that you may not realize.  Driving an older car can actually save you thousands of dollars a year!!

Here are all the reasons to keep driving that older car:

1. The Obvious One – A Monthly Payment

Of course if you stick with an older car that you can afford and pay cash you won’t have a monthly payment.  Skipping that payment though also means skipping the interest payments!

Average car loan interest rates are around 4-5% and they are typically paid over 5 years (or 60 months).  In 2020 the average new car price was $38,378, let’s assume you were at least a tad bit frugal and paid $25,000.  With an interest rate of 4.5% you would pay $2,965 in interest and have monthly payments of $466.

What would an extra $466 in your budget each month look like?

2. Lower Insurance Payments

Driving an older car significantly lowers your car insurance payments each month in at least two ways.

First, your older car is worth less to replace and overall the insurance company starts with a lower cost basis compared to a brand new car.  Typically insurance rates drop by 3-4% for every year your vehicle ages.  That means driving an 8 year old car would have 25% cheaper insurance!

Second, not having a car loan helps your credit score stay higher.  Your credit score is used to factor your risk level for most insurance agencies and does have a large impact on the rates you pay.  (This factor  is reduced after approximately 1 year of good payments.)

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