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  • Stephen Gardner

Buy cars the smart way!

Updated: Aug 29, 2018

I want to share some real numbers I put together to help a client of mine purchase a truck from the insurance plan he set up several years earlier. As of writing this, I know clients with a 3.99% car loan and others as high as 24%. The one with 24% really needs this concept but the one with 3.99% would benefit too and you’ll see why. We’ll be using 7% APR.


This client opened a policy several years ago with a $600 a month savings plan or $7200 a year. After 5 years he had $32,904 in liquid cash and $281,295 in tax-free death benefit if anything happened to him. One morning he called me to ask if I could remind him why it was better to use his insurance contract versus financing his truck through the bank. He let me know he was looking at a $25,000 truck with a 7% interest rate and a 60 month pay off plan.



As we calculated the payment, both our calculators came up with a $495 payment. This was a payment he could afford. I then walked him through an example of using his insurance contract verse a bank. I’ll walk you through the same example so you can see the numbers. He was shocked by the final results and ultimately used his own money from his insurance contract to make the purchase.


Imagine two families are at the point where they need to purchase a new car. The first family decides to go to their local bank where their families have been banking for three generations and everyone knows their name. They fill out all the bank paperwork and apply for a loan. The bank checks their credit, verifies their income and checks their employment history. They also do a debt-to-income verification to make sure they are good at repaying past loans. After all is said and done, they are approved for a car loan of $25,000 with a 7% interest rate and a 60 month repayment plan.


The second family has been safely saving money inside their insurance contract and decides to borrow some of the equity to finance the car purchase. They call the life insurance company and request their money be mailed to them. The insurance company verifies they are the owner and sends them the check. There is no credit check or proof of employment. It’s your money and they send it to you.


At this time the insurance group will remind you that it is up to you to pay back the loan on your terms and they will leave it up to you to decide how that happens. They also remind you that your borrowed money will continue to earn interest because they will be lending you money from the life insurance company’s general fund and will be using your money as collateral. You decide your repayment schedule will look exactly like it would have with the bank, but instead you will pay it to yourself instead of the bank. You will pay $25,000 back over that 60 months with 7% interest. Let's look at a traditional loan repayment.


Option 1: Family 1 Traditional Car financing through a Bank

Auto Loan period: 5 years (60 months)

Monthly payment: $495

Auto Loan amount paid: -$25,000

Interest @ 7% paid: -$4,700

Total paid to BANK: -$29,700

Car value after 5 years: +$12,000

Total Loss: -$17,700


Most people look at this car buying example and understand it well because it is the way they have always purchased cars up to this point. You buy a car, you pay the bank and at the end of 5 years it isn’t worth much. Most have accepted this as the only way to buy a car. Family #1 pays $495 a month for 60 months and after 5 years has paid $29,700 to the bank.


Remove the car for a minute and let’s just talk numbers. If a financial adviser said “give me $25,000 and in 5 years I will give you back $12,000, you would run as far away from them as possible. Yet we walk into banks hoping our credit and income are good enough for this exact losing scenario! We beg the bank to rob us. There is a smarter way!


Really quick – up to this point in your life, how many cars have you owned?


How many of them did you lose money on or end up upside down in when trying to buy the next car? Keep this in mind while you learn a smarter way to control and use your own money.


According to the American Automobile Association, over 38% of car owners are upside down with their car value.


Let’s break this down to better understand what has happened. You bought a $25,000 car and at the end of 5 years have paid $29,700 to the bank. You paid $4,700 to finance the car. Banks don’t want you to know what this car purchase is really costing you so they only speak to you in terms of monthly payments. On top of that, they use the acronym APR to disguise how much you will really pay in interest on the car. You think you are paying 7% because this is what you have been led to believe, but you are really paying 18.8%. Take the interest of $4,700 and divided it into the car price of $25,000 you get .188.


To calculate the interest rate you multiply it by 100 and you get 18.8% total interest. You paid 18.8% interest on your car purchase! It’s no wonder you feel like you aren’t accumulating wealth! The bank is the real winner here. You’ve always been on the losing side of the interest equation. This is why banks are the most lucrative businesses in the world. There is a more productive way to finance cars and other major purchases, but the banks don’t want you to know about it. If you knew this information and made purchases this alternative way, you would be a competitor and they need you to be a customer.


When you finance your car through a bank, you end up paying interest for the right to borrow the banks money. You also end up losing value on the car each year because mileage, wear and tear, etc. In this example you lost $4,700 to interest and $13,000 to depreciation for a total loss of $17,700. Interest payments and depreciation can end up costing you tens of thousands of dollars on each car you purchase. Imagine buying this way on 10 vehicles and losing out on $177,000. Ouch!


Again, the traditional way of buying cars through your local bank or credit union may seem incredibly normal to most people because this is what you have been told to do most of your life by the banks. Let me repeat that, THE BANK taught you to buy cars this way!


However, there is a better way to buy cars and you won’t look at car buying the same way once you learn this strategy. It’s like the first time someone pointed out the arrow between the E and the x in the FedEx logo. It had always been there but I just didn’t know it. But now I do notice it and every time I see that arrow, I remember I am buying cars the smarter way. You can, too!


At first glance there doesn’t seem to be much difference between family 1 and family 2. The amount borrowed is the same. The interest rate is the same. The monthly payment time frame is the same. The amount you end up with at the end of the loan is significantly different! With traditional financing you are taking money out of your pocket and giving it to the bank. The bank has possession of your money.


By being their own source of financing, family 2 was taking money out of their pocket and sticking it in their other pocket. At the end of 5 years, they’ve paid themselves $29,700 instead of the bank. There is no fuzzy math here. You had to make the car payment to someone; in this case it was to yourself! So now family 2 has possession of the $29,700 inside their contract. Plus they have a $12,000 car they can sell for a total of $41,700 placed back in their possession for the next purchase. Trust me, this is a good problem to have.


Option 2: Family 2 Car financing through their insurance contract

Auto Loan period: 5 years (60 months)

Monthly payment: $495

Auto Loan amount paid: +$25,000

Interest @ 7% paid: +$4,700

Total paid to YOURSELF: +$29,700

Car value after 5 years: +$12,000

Total Gain: + $41,700


At the end of 5 years of paying on a car, would you rather have $12,000 or $41,700?


It’s a no brainer. In fact, it’s very lucrative and beneficial for the one receiving the money. From now on that gets to be you! Quit making the banks rich and start making yourself rich by being your own source of financing on a car you would have purchased and driven anyway. As you can see, there was no additional out of pocket expense or payment eating into your monthly cash flow.


What if I told you it actually gets better than this? Remember a few paragraphs ago I mentioned that when you borrow money out of your insurance contract it continues to earn interest as if it were never gone? Let me show you an example of this exact scenario but with the $25,000 continuing to earn 5% each year. Notice I didn’t say 10% or some crazy high number? Just 5%!

Year 1- $25,000 has grown to $26,250.

Year 2- $26,250 has grown to $27,562.

Year 3- $27,562 has grown to $28,941.

Year 4- $28,941 has grown to $30,388.

Year 5- $30,388 has grown to $31,907.


Over 5 years the $25,000 in your contract continued to earn interest and grew in value by $6,907. If we add the $6,907 to the $41,700 you put back into your pocket for a total of $48,607. We still had to pay interest so we minus the $4700 for a total increase of $43,907. Remember we pay simple interest to the insurance company so our money can continue earning compounding interest. This is the power that comes from paying yourself like the bank, having your loan amount compound interest each year as if it were never gone and recoup the money you lose to depreciation.


The total economic value added to your family is $43,907 by being your own source of financing. If the math seems fuzzy, please read through it again. In fact, I recommend looking it over a few times to let it really sink in. I assure you there are no tricks or smoke and mirrors going on here. The math doesn’t lie. When you take control of your own money and put it to good use, it will grow for you. The money in your contract will continue to earn interest whether it is inside or outside of the plan. By using these idle dollars to your advantage, you can turn ordinary purchases into retirement building dollars. After all, who do you trust more than yourself? This is the power of financing your own purchases with a plan that continues to earn interest even when you access your money.


Take a minute to run the numbers on your personal car loan(s). Take your monthly payment and times it by the number of payments you set up for repayment. How much do you stand to lose in interest and depreciation? How many cars will you buy over your lifetime? Do you have children? Will they need cars, too? Just by harnessing the flow of money from car purchases, you can put a significant amount of money back into your pocket where it is safe and available to use on the next purchase or in retirement.


I have personally used this strategy on our family cars. I have clients that use this strategy on cars, real estate, hard money lending, company equipment, tow trucks, vacation, and airplanes. Its such a great way to buy the things you want and need and recover the money you would have normally lost.


Let me show you how to use this strategy to increase your wealth, legally avoid taxes and buy cars the smart way. The way that puts money back in your pocket.


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Stephen teaches about money, finance, getting out of debt and building tax free wealth.