Dave Ramsey Said to ‘Save Yourself a Financial Headache’ by Doing This When Buying a Car

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When you are buying a vehicle, Dave Ramsey suggests avoiding taking out a car loan or, if you must, paying it off ASAP. Here’s why. 

Buying a car is a major purchase. You want to make smart financial choices during the process. Dave Ramsey recommends one particular method of buying a car that he believes can save you a lot of money and hassle in the long run.

Here’s what Ramsey suggests.

Dave Ramsey recommendation for buying a vehicle

Ramsey’s suggestion for buying a car the right way has to do with how you pay for your vehicle.

“If you want to save yourself a financial headache, skip GAP insurance and buy a used car with cash in the first place,” Ramsey said. “If you already have a car loan, make it your goal to pay it off as quickly as possible so you can drop the GAP coverage and lower your premium.”

Ramsey is making this recommendation both because paying cash for a used car allows you to avoid car loan payments and it enables you to avoid having to purchase GAP insurance, as he mentioned.

GAP insurance is a type of auto insurance that covers the gap between what you owe on your car and what your vehicle is worth (as the name suggests). Often, a car ends up being worth less than you owe on it — especially if you bought a brand new vehicle that loses a lot of value right away, or if you didn’t make a large down payment or took out a car loan with a long payoff time.

Insurers pay fair market value if your car is totaled, but you’d have to pay off your full loan amount even if it is a larger amount. GAP insurance would pay the difference between the insurance check you get and your outstanding loan balance.

Should you listen to Ramsey?

Ramsey’s suggestion to buy a used car with cash instead of getting a car loan can make a lot of sense — if it is feasible.

Avoiding a car loan does save you a ton of hassle. You won’t have to go through the process of applying for a car loan or negotiating financing with your dealer — you can just bargain based on the price of the vehicle. You also won’t have monthly payments to worry about and won’t have to buy GAP insurance.

Cars are also depreciating assets, which means they go down in value after you buy them. It doesn’t make a lot of sense to borrow for an asset that doesn’t go up in value since you lose money on interest even as your asset becomes worth less.

So, if you can take cash out of your savings account to pay for a used car, then you should do it. But, for many people, this is not a possibility. A car is often necessary to get to work or fulfill family obligations and you need one in good condition. If you have to borrow to make that happen, then following this advice is impossible.

If you do need to borrow, then you should absolutely make sure you have GAP insurance to avoid having to pay off a balance on a totaled car. And, you may also want to drive your vehicle as long as you can after paying off your car loan while saving up to pay cash for your next vehicle, so following Ramsey’s advice will be possible for you in the future.

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