I swore I'd never take on debt for a car, but I was surprised by how well my first auto loan fit into my financial plan
- I swore I'd never take on debt for a depreciating asset, like a car. My husband and I have always saved to buy cars in cash so an auto loan was never necessary.
- But when our transmission died unexpectedly and we didn't have enough saved to buy a decent car, my husband suggested an auto loan.
- We looked for a good interest rate and settled on a loan with a 4.05% APR and bought a good-quality car. I learned an important lesson about being flexible with my finances.
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In the community of personal finance writers and experts that I belong to, following certain rules is paramount. Never spend more than you earn. Always have an emergency fund. Never raid your retirement fund. Always contribute enough to get the employer match for your 401(k). The list goes on.
But what happens when you find yourself in a situation where the rules don't apply? That's what my husband and I found out when the transmission on our vehicle died before we could afford to buy a replacement.
Why we vowed never to get a car loan
Up until last year, my husband and I had paid cash for every car we ever owned. My parents instilled the Dave Ramsey philosophy in me: Never take a loan on a depreciating asset, like a car.
My husband had a similar upbringing, so we stuck to that philosophy for years. Since I had already paid off my student loans, I hadn't taken on any debt except our mortgage. I smugly looked down on anyone with a nice car if I knew they took out a loan for it.
Since I write about personal finance, I also felt a responsibility to uphold the principles I write about. Taking on unnecessary debt as a personal finance expert would be like eating fast food as a nutritionist.
Our car-buying approach was to save money regularly and pay for every car in cash. In 2017, we spent $4,600 on a 2005 Toyota Corolla and started stashing money in a special savings account for our next car. We hoped to get at least five years out of the Corolla before needing to replace it.
Fast forward to 2019 and a mechanic telling us our transmission was shot, and it would cost about $2,000 to replace it. We decided it wasn't worth spending that much on repairs when the car already had 155,000 miles on it.
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But now we were at a crossroads: We didn't have enough in the savings account to buy a decent vehicle in cash, and we wanted to avoid financing a car.
We thought about taking money from our emergency fund and using it to buy a used car for around $5,000, but we also didn't want to end up in this situation again - buying an old car and having to replace it a couple years later because of a huge mechanical problem.
Raiding our emergency fund also didn't seem like a good idea. My husband and I are both self-employed, which means we have less job security than the average person. Our emergency fund keeps us afloat during lean times, like when a client goes on vacation and doesn't assign work for a while. We've only ever used our emergency fund when it's been truly necessary, like for a surprise medical bill or to pay the rent when a freelance client dried up.
At that point, we realized a car loan was the best option because it would allow us to buy something reliable and not drain the emergency fund. But was I ready to go against my principles?
Why a car loan made sense
As soon as my husband suggested getting a car loan, I felt a weight lifted from my shoulders.
So much of my identity was wrapped up in being a "financial expert," so going against my own advice felt blasphemous. Hearing my husband suggest the idea first made it easier to let go of all that.
We started looking for a lightly-used car and found one we liked. It was a 2016 Toyota Camry with only 45,000 miles and a price tag of $15,500
I called a few lenders to see what kind of financing was available. Because my husband and I have high credit scores, we qualified for a 4.05% interest rate from a local credit union. We would pay about $1,000 in interest over the life of the loan.
Paying $1,000 in interest stings, but it's the best option we found. This experience was an important lesson in being flexible. The rules of personal finance are almost never set in stone, and sometimes you have to break them if that's what's best for your specific situation.
Now, our plan is to pay the auto loan and then start saving that same amount of money in a special savings account. We should have enough to buy a nice replacement when the car is 12 years old. Our previous car was 14 years old when it died, and since my husband and I are diligent about oil changes and maintenance, I'm confident it will last until then.
We don't plan on getting rid of the car when it's a certain mileage or age, but if the transmission or engine dies we'll be ready to pay cash for its replacement.
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