How to pay for a new vehicle

Growing up, I always thought there were three financial tiers for buying a car. First tier, you're in school and your parents help you buy you a car, or buy one for you outright. My first three cars were at this level, one in high school (a 1971 Oldsmobile Cutlass convertible) and two in college (a 1980 Cutlass and a 1986 Cutlass). Second tier, you go to a dealer and finance a car. My fourth car was at this level, in 1995, about two years after I graduated from college, I went to the BMW dealer and bought a two-year old 1993 BMW 325is for around $25,000. I had saved enough to make a 20% down payment, but the car payments were about at my limit, and I ended up carrying a balance on my credit card for about the first year I owned it. Not a lot, about $1,000, but I just couldn't manage to pay off the balance right away.

The third tier I imagined was the bastion of the super rich, where you go to the dealer and just write a check for a car (or open a suitcase full of bills). My fifth car was (in a way) at this level. In 2004, the clutch had just gone out on the BMW, it would have cost more to fix it than the car was worth. It wasn't in great condition, so at that point it was toast, I sold it to a mechanic at the BMW dealer for $200. I had just made an offer on my house and didn't know exactly what the payments would be, so I wanted to buy a vehicle I could afford for cash. I bought a 1982 Toyota Land Cruiser on eBay for about $2,400 cash. I didn't think that I would be able to do that for a nicer vehicle. I drove the Land Cruiser for two years, and sold it on eBay for about what I paid for it, but I put about $2,000 in maintenance into it so it wasn't a great deal. Last year I bought a 2005 Lexus ES 330 (it was a year old with 12,000 miles on it) but I still felt like I needed a loan, this time from the credit union.

Last year my sister and I went to see Dave Ramsey speak, and when he started talking about car loans, a light went on in my head. The only reason need a loan to buy a car is because you want it before you can afford to pay for it (duh!). You're paying huge fees for interest and financing just because you can't wait. Over five years I paid about $7,000 in interest on the BMW that I sold for scrap. That just doesn't make sense. Dave Ramsey's approach is presented here. I paid off the loan on my Lexus after a few months, and now I'm saving the money I would have spent on a car payment. I'm continuing to have the loan payment amount automatically deducted from my paycheck, so I never miss it. Now that money goes into an interest earning account, and when I'm ready for a new car in four or five years, I'll have enough cash to plunk down and pay for it. And I'll never have a car payment again.