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The Reverse Car Loan--Never Pay Interest Again

Updated on February 10, 2013
KeithTax profile image

Keith Schroeder writes The Wealthy Accountant blog with 30 years experience in the tax field. He is the tax adviser of Mr. Money Mustache.

Have you heard about the reverse home mortgage? A reverse home mortgage allows you to receive an income stream or lump sum payment for the equity in your home. You never make payments. You sign over future interest rights to the lender. When you die your home goes to the lender who sells the home to recoup the loan. You never get the full value of your home’s equity. The lender’s risk is that you live too long, therefore reducing or eliminating any profit.

The last time I had a car loan was 1984 and it was the worse car loan possible, a lease. I blame my actions on youthful stupidity. However, I am a fast learner. Borrowing money on a wasting asset is insanity. For a large portion of the lend you are under water (owe more than the car is worth). Buy a new car and the moment you drive it off the lot and your new car is worth 20% less. Maybe more.

I buy used cars and drive them forever. I bought most of my cars from the bank (bank repo) and usually purchase for several thousand below Blue Book. You can jump start the reverse auto loan process faster with a used vehicle, but it works just as well with a new vehicle. The best news of all: you will never pay interest on a car loan again.

Jumpstart the Program

Before we get into the details of the reverse auto loan, I want to share a few pointers.

Buy for the long run: When you purchase a vehicle always review the total cost of the car. Factor in expenses like insurance, repairs, maintenance, and fuel over the life of the car. Certain cars last longer. Cheap cars are not always cheap. Buy a quality car and own it for ten years. The longer you own a vehicle, the less depreciation is per year (see chart).

Maintenance: The only way to win the auto game (a wasting asset) is to own the car longer. Buying the cheapest piece of junk will not save you money. Crap cars will kill you on maintenance. You can review problems with the brand and make of car you are considering at autocomplaints.com. Before buying used or new, check out how owners like the vehicle.

Auto Depreciation

Year
Car Value
Depreciation
Average Annual Depreciation
Purchase
$25,000.00
$5,000.00
$5,000.00
1
$18,000.00
$7,000.00
$7,000.00
2
$15,000.00
$10,000.00
$5,000.00
3
$13,000.00
$12,000.00
$4,000.00
4
$11,000.00
$14,000.00
$3,500.00
5
$9,000.00
$16,000.00
$3,200.00
6
$7,000.00
$18,000.00
$3,000.00
7
$6,000.00
$19,000.00
$2,714.29
8
$5,000.00
$20,000.00
$2,500.00
9
$4,000.00
$21,000.00
$2,333.33
10
$3,000.00
$22,000.00
$2,200.00

The Reverse Car Loan Program

The idea of never paying interest on any car again had you excited, didn’t it? I don’t blame you. Cars are one of the biggest expenses in most people’s lives. Any way to reduce this cost is money in the bank.Let me go back and show you how I started my reverse car loan program which is significantly different than the reverse mortgage. I bought my first car around 1980. Lease payments sounded like such a good idea to the kid I was. Soon, I discovered I hated monthly payments.

I realized that the only real way to fund a vehicle is by paying cash. In the Total Car Cost table I leave out interest as an expense because we do not want to pay interest. Not only does paying cash eliminate the interest cost, you get a better deal on new vehicle purchases. It is better to take the cash-back offers than the low interest auto loans offered by the manufacturers or dealers.

So, where do you get the money to pay cash on your auto purchase? From the bank, of course.

Step 1: Once your current car is paid off, continue making payments into a segregated bank account. Start with a money market or savings account and as the balance grows, use short-term certificates of deposit for a better rate of return.

Step 2: Four years of payments to your segregated account should be enough to buy your next vehicle with cash. Remember, you want to own your cars 10 or so years to reduce the average depreciation cost per year.

Step 3: Refill the coffer. If you buy a car for $15,000 after trade-in or private sale, divide the $15,000 by 48. Do not worry about amortizing for interest. You don’t pay interest anymore; you get paid interest! In this example, you add $312.50 each month to your segregated auto fund for 48 months. Accumulating interest should cover any auto price increases.

It is as simple as that. You go from paying interest to getting paid interest by restructuring the way you own your car. It is important to open a separate account to hold these funds. Mixing money saved for a future car purchase with other money never works. The money always grows legs. Choose a bank or credit union that has no fees. Small local credit unions usually offer the best deals.

Never scramble for money to buy a car again. You can negotiate from a position of power. Do your research. Pay cash for the best deal. And never have a car payment again.

One final note: If finances get tight (medical emergency, job loss, or other major bill) you can stop paying into the auto fund until things turn around. Remember, you only pay into the fund for four years when you will own your car much longer. Try that with a regular car loan.

Total Car Costs

Expense
Cost Over Life of Car
Purchase - Trade-in Value
$15,000.00
Gas (100,0000 miles)
$12,000.00
Insurance
$6,000.00
Oil Changes
$500.00
Tires
$800.00
Washing
$300.00
Misc Maintenance
$2,000.00
Total Cost
$36,600.00

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      Mooch 20 months ago

      Wha wha what! I don't like monthly payments but buy a car and make monthly payments looks good on paper

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