When someone pays off a car loan, they feel great relief. They believe that they now have more spending money available for other lifestyle spending. While it is true that their loan obligation is now gone, what they may be missing is the invisible car payment that they are incurring but not recognizing.
To explain this invisible car payment with an example, let’s say that you just paid cash for a $20,000 car. The financial balance of your personal assets stayed the same during this transaction: cash went down by $20,000 but your transportation assets increased by $20,000. Then, over the next year, let’s say that the market-value of your car declined by $2,000, so it is only worth $18,000 if you were to sell it. Where, exactly, did that $2,000 go? It was consumed by you. The vehicle depreciated by both time and usage while you owned it. Your financial balance of transportation assets declined by $2,000 over the year, and that is a real reduction to your net worth. In order to get your transportation asset values back up to $20,000, you must deposit $2,000 into a car-savings reserve. This is the money that you will need to make your next vehicle purchase. This payment of $2,000 (or $167 per month) is the invisible car payment. It is a real expenditure, the natural fall in value, that anyone is incurring while they own a vehicle, but very few are aware that it exists.
Anytime that your current car is due for a replacement, and you’ve been making invisible car payments to your car-savings reserve, then you will always have the money to purchase a replacement vehicle. By making invisible car payments, you’ll always have $20,000 of value – either in the form of cash (the car-savings reserve) or in the current blue-book value of the car that you can turn into cash by selling it. By making car-reserve payments, you maintain the value of your transportation assets to balance out the depreciating value of your current car.
What would happen if you do not make any invisible car payments? Sooner or later you will need to replace your car, and when you do, you will not have the money to make a purchase with cash. In this situation, many people commonly borrow money or lease a car, both of which require interest payments that make anyone who incurs them financially worse off. The only way to avoid the interest and fees from car loans and leases is to build a car-savings reserve for your next car while you are driving your current car.