The Federal Reserve Bank of New York reported that at the end of the third quarter of 2019, our collective car loan balance was a record $1.32 trillion. That's up from the previous (pre-financial crisis) high of $823 billion in late 2005.
Used-car prices have risen, too, but the monthly loan average of $400 is still much better than the average $550 for a new car. The average used-car loan is for 65 months. Over 65 months, saving the $150 a month and earning an annualized 5% would add up to about $11,000. Keep that $11,000 growing for another 25 years, and you could have $37,000 waiting for you in retirement.
If you can manage to borrow less for a shorter amount of time, you will do yourself a huge favor. Let's say you choose a used car with a $400 monthly payment that lasts for "just" 48 months. If you have a solid credit score, that's a startling loan balance of about $17,000. With a trade-in and/or down payment, that might give you a budget of $20,000.
Like new cars? Focus on the potential longer-term payoff. Compare a $550 car payment that runs for 70 months -- the current average -- with a $400 payment over 48 months.
Your payments for the first 48 months will be $150 lower. If you invest that money and earn an annualized 5%, that's nearly $8,000. Then, from months 49 to 70, when you would still be paying off the new car, you're loan free. So, let's assume you save the entire $400 a month. Assuming the same 5% annualized return, that works out to having another $9,500 or so by age 70.
That would put you $17,000 ahead of paying off the higher-cost new car over a longer term. If you left that $17,000 growing for another 20 years it would be worth about $45,000 in 20 years. Got 30 years until you retire? It would be worth more than $73,000. If you're a two-car household, borrowing less and paying it back faster becomes a six-figure win for your retirement.
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