Confession Time: I Just Financed a Car With a 6-Year Loan, And I’m OK With It

by Travis Pizel · 34 comments

I’m sure I’ll get some disagreement with this decision, but I’m a big boy and I can take it.

Here’s the story: I’m a personal finance blogger, I just financed our new (to us) van with a six-year loan, and I honestly think it was a good decision.

At the end of January, my wife and I completed a debt management plan in which we paid off $109,000 of credit card debt in 55 months. In order to make a large payment to our program each month, we had to live on a very tight budget. We weren’t able to save up the money necessary to pay cash for our vehicle (as we were hoping to do).

The van we were driving was 10 years old. While I realize that many vehicles last longer than that, it was becoming a money pit. We’d just put new tires and brakes into it, and the power steering sounded like it was next. One day after work, the blinkers stopped working as well. Expecting this was the beginning of a never-ending parade of maintenance costs, we decided it was time to replace our family’s primary vehicle.

We searched and found a 2013 van that fulfilled all of our requirements. Since it was a year old, it cost thousands of dollars less than a comparable brand new model. We negotiated with the salesperson and talked him down to below the Kelly Blue Book value. Not being the best negotiator, I counted this as a success.

Then it came time to talk to the finance guy.

His first question, of course, was what kind of monthly payment we were looking for. This is a common tactic of dealerships, so they can extend the term of the loan and give you an attractive monthly payment. I asked him to work up numbers for several terms, which we could discuss in private.

When it was all said and done, we decided to go with a six-year term. As we were signing the papers, I went through all the major talking points in my head, trying to convince myself I was making a mistake.

How Our Car Loan Could’ve Been a Mistake

Maintenance is cheaper than a car payment

In theory, the cost of fixing the old van would’ve been cheaper than the car payments on the new van. There’s no way, however, to accurately predict whether or not this would’ve actually been true. We spent a couple grand on maintenance in 2013, and the van just seemed to be sliding downhill. I didn’t want to wait for something catastrophic or dangerous to happen to it.

We could buy a cheaper vehicle

We could look for an older, less expensive vehicle — but then I’d likely be back at the dealership looking for a new car sooner. The plan here is to ride this van for many years after it’s paid off. This vehicle is only a year old, and we’re hoping it lasts at least 10 years.

We can afford a higher payment

We could’ve gone with a shorter term and a higher payment; however, replacing the family vehicle isn’t the only thing we’ve been holding off on. We have a laundry list of things we need to fix, update, and change. We’re going with the longer term and lower payment to give us the flexibility to do all of the other things on our list. Then, we’ll determine if we can pay extra towards the vehicle loan every month.

We’re paying a LOT of money for a depreciating asset

Some people drive around in old clunkers because it seems crazy to make payments on something that depreciates in value. I don’t view my car as an asset; I view it as a service. I’m not paying to have a hunk of metal, glass, and plastic in my garage; I’m paying to have the ability to safely transport my family where we want to go.

Paying interest is throwing money away

I agree with this to an extent. In this case, the interest rate was the lowest I’ve ever had on a car loan: 1.9%. What I’m paying for is the convenience of having a new and dependable vehicle for years to come.

If the van lasts as long as we hope it will, we’ll be able to pay for this van, and then save up to pay cash for our next vehicle.

Would you ever finance a vehicle with a six-year loan? Do you think my reasoning makes sense, or did I just talk myself into buying a new car?

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{ read the comments below or add one }

  • vicki says:

    In your case it makes sense. With a family, you needed a dependable vehicle. You needed low payments and that interest rate isn’t bad. Viewing your vehicle as a service is how I view mine. The fact you paid off 100,000 dollar debt in 55 months is to be applauded! Great job!

  • Syed says:

    Sounds like a solid decision to me. Low interest rate and actually buying a car that fits your families needs (rather than a shiny new luxury model). Can’t go wrong with that.

    • Yeah, none of that fancy, schmantzy stuff for us (although the van does have some nice features). It’s all about our needs and what would make us more comfortable when using it to get somewhere. Not about shiny rims, or big engines. Thanks for the support!

  • 1.9% is an AMAZING interest rate on a car loan! In my opinion, I think you made the right decision.

  • Kim says:

    As a general rule, I am opposed to 6 year car loans because that’s a way many, many people buy things they can’t afford by making the payment low enough to seem OK. In your case, I think it’s different because you can make a higher payment, but you have other reasons for taking the longer term at a low rate. If it was 7% or if you took the extra money to buy stupid things you didn’t need, that would be a bad idea.

  • TREVOR SCHUMANN says:

    As a Finance Manager at a car dealership I reccomend longer terms to my customers all the time. What most people don’t understand is that longer terms lower your DTI ratio (Debt to income) and as a result often have equal or even lower rates than shorter term loans. Further since almost every retail installment contract these days is simple interest, no pre-payment penalty is involved. What that means to you is that ultamitly the term is up to you. You can always double up on payments and have the difference applied directly to your principal ballance. (Though I wouldn’t see the point at this low of a rate). The only possible thing that you may be overlooking is whether by taking the special rate you forfeited a rebate you otherwise would have qualified for. If this rebate is greater than the difference between the rate you would have qualified for on the open mkt and the special rate you paid (assuming the 1.9%) was a promotional rate, you just lost money. As a sidenote dealers don’t care whether you take the special rate or the rebate, we get paid the same either way. The other option you didn’t meantion was just to buy an extended service contract for your old vehicle. This almost certainly would have been a cheaper option and would offer you peace of mind for a few more years. Contrary to popular belief in financial circles, extended waranties are not inherantly bad deal. Like everything else you just should shop around and get the best possible price. For customers without an emergency saving fund, it is crazy to not get an extended waranty at least as long as the financing term.

    • Lots of great advice here, Trevor…thank you for sharing your thoughts. There was, unfortunately, rebate for us to take advantage of. I didn’t mention this, but we DID purchase an extended warranty. The van is under warranty for the entire life of our loan. You’re right, that does give us a lot of peace of mind. 🙂

  • Sassy Mamaw says:

    Travis, I can definitely see where you are coming from on this. A longer term on a low interest item can help you cash flow the things you need now, and hopefully put you in a better position for your next car.

    For myself, I think I will try driving something a little older, and keeping the loan down to three years.

    You gotta do what’s right for you.

    • The thought did enter our mind regarding driving something a little older….but we might end up with maintenance costs AND a loan payment with that route. While there are no guarantees, we shouldn’t have any high cost repairs on our newer van for awhile. Great to hear from you, my friend!

  • Norman says:

    I want to congratulate you and your wife for paying off $109,000 in 55 months. That’s an incredible accomplishment! I bet you’ll never get in debt like that again. Since you have a great car loan in place, I hope that you will make savings a priority.

    • Yeah, we’re NEVER getting back into that situation. Saving for retirement and building up an emergency fund is definitely a priority now, Norman…as is almost daily communication about our finances. Thanks for your kind words, and for your comment!

  • We did this with my wife’s car. While I could have paid that car in cash, we got a 1.99% rate for 6 years. The reason why I did this was because I want to do more things with my money that earn me way more than 1.99%. Plus, I like having liquidity in my accounts and having all of my cash sucked up in a car is not what I want. If you do it right, then you can pay off the loan early and not have any problem. You don’t have to stretch the loan until the end.

    • I’d like to say I did it so I could invest the money and get a better return than 1.9 percent….but I didn’t. In our case we simply needed to replace the vehicle and a longer loan fit our budget needs better. Our goal is the pay it off earlier as out cash flow continues to improve over the next few years, but for now it was simply a budgetary statement.

      • David Ning says:

        No worries there Travis. You are doing awesome with your journey to build a solid financial footing. It may seem far away now but you’ll be financially independent in no time as long as you keep this up!

  • Lee says:

    I see 2 things that lead me to question this:
    a. Your previous 10-year-old van was costing u at the repair shop -brakes, tires, power steering, blinkers. Do u think u’ll need to replace the tires or brakes on ur new ’13 van? Now, u’ll have those same maintenance costs PLUS a monthly payment. I hope u have a decent-sized emergency fund for those maintenance costs.
    b. Your “new” ’13 van is a year old (no mention of how many miles), & a 6 year loan means, u’ll be making payments until it’s 7 years old. This seems reasonable, given the low interest rate, but depends on how many miles per year ur family puts on it. How many miles per year did u put on ur old van? Above ave miles will mean higher maintenance & repair costs.

    • David Ning says:

      Buying a new car is like replacing all the old car’s parts. They’ll still need maintenance, but it won’t be needed for at least a couple years for the minor wear and tear stuff and longer for the bigger parts.

      He’ll still need to pay for those tune ups, but only if he doesn’t do them himself.

      You are right though, the more miles he drives, the higher the maintenance cost. But then if he doesn’t drive the car that much, why not keep the older car?

    • Travis Pizel says:

      Great questions Lee, let me try to answer them. As David mentioned in his response, yes, I will have to do those same maintenance items…but not for years down the road. I like his analogy that I’m essentially paying to replace all the parts now.

      My new to us van came with 11K miles on it, and we usually put about 12K per year on it as it is our primary vehicle. Which means that by the time it’s paid off (assuming no extra payments) it will have 83K miles on it. Our old van had over 130K when we unloaded it. So, hopefully we’ll get at least 4 more years of use out of it payment free…..

  • UH2L says:

    Long loans aren’t necessarily a bad thing. The money you save on payments each month can be invested which could bring you some returns.

    What’s interesting though is that people with long loans complain about being “upside down” on a loan because the car is worth less than the loan value. That’s because compared to people on a shorter loan, they paid less into the loan to begin with! If anything, that can be motivation to keep the car longer and not sell or trade it in.

    I always find resale value a funny thing. People pay more for a car because it has higher resale value but they are putting more money into a depreciating asset without considering that they may lose less money on a cheaper car with lower resale value. The money saved up front can be invested elsewhere. Resale value should be a moot point to car owners who never sell their vehicle and run it into the ground. Then, maintenance costs matter more.

    As a car fanatic, I think cars are so much more than appliances and depreciating assets. It’s worth it to me to own multiple cars for the way they drive, features, style and overall experience each has to offer. They do require insurance and TLC though.

    • David Ning says:

      Speaking like a true enthusiast UH2L! I agree that cars are much more than just some depreciating asset, but be careful that this can become a great excuse to spend more than necessary.

      I think resale value is mighty important for people who lease their cars, because it’ll directly affect the monthly payment, as they subtract that out from the purchase price.

      Also, part of the reason cars have higher resale value is that they are cheaper to maintain as a used car. So maintenance costs and resale value are related for everyday cars.

      • UH2L says:

        David,

        Yes, I speak like somebody who is into cars. All my cars have a value that is less than one nice new BMW. I save and budget but cars can be an addiction.

        In some cases, cars with higher resale values are cheaper to maintain but not always. BMW’s for instance retain their value very well more for their cache and characteristics even though parts and labor can be very expensive. A used car with a poor resale value and low cost of ownership is probably the best type of car to buy. Within the term of a lease maintenance costs aren’t usually an issue and then resale value is all that matters.

        Another thing most of the readers and commenters probably forget is that newer cars are much safer and much more reliable! Features like stability control, side airbags, panic brake assist were not offered on most average priced vehicles only 5 years ago. Now they are prevalent and not just offered on luxury vehicles.

        People need to ask themselves, “How much are your your family’s and friends’ lives worth to you?”

        • David Ning says:

          Thanks for chiming in with your expertise on the resale value.

          And you are right, reliability is definitely worth a ton of money. I just found out today that my aunt was rear ended by a truck going at full speed (they later found out he was DUI). Good thing she was driving a car with strong sheet metal and air bags up the wazoo. You just never know.

    • Travis Pizel says:

      Good thoughts, UH2L. I don’t buy cars with resale value in mind. As mentioned, I’m buying 80% a service (moving my family around) and 20% comfort (what do I want in a car). Nobody thinks about resale value when they purchase a couch or a computer, or a bedroom set….why is a car any different?

  • JJ says:

    Well, this leaves me out; I’m on disability and I don’t make enough to qualify for a loan.

  • Steve says:

    As long as you made sure the finance guy (who is really part of the sales team) didn’t mess with the numbers for the six year loan, the 1.9% loan sounds good. I would have multiplied the monthly payments time 72 and compared the payments to the actual purchase price to make sure they didn’t do something underhanded.

    • David Ning says:

      That’s a good point Steve. Always double check the numbers. I know some companies give you a 0.25% rate reduction if you do auto debit, which the dealership automatically tries to take from you by offering you extra services to “absorb” the discount when they try to up-sell you on something.

    • Travis Pizel says:

      Yikes, that would be a horrible thing for a finance person to do. I have to admit that I didn’t….maybe I’m a little too trusting. You can be sure I’ll be doing so tonight (digging out my documentation…..) – not that there’s anything I can do about it now I guess. Thanks for reading!

  • I’d had done the same. I financed my current vehicle with a 3-year loan at 0.9% interest rate back in 2011.

    • David Ning says:

      I have a similar story at 2 years for 0.9% annually in 2010. I wished they allowed me to do a 6-year loan back then because the rate was so low. I made out like a bandit since the markets have been so good, but it was a good decision because the expected return on practically any common investment is higher than 0.9%.

      They also threw in a kicker and allowed me to use my credit card to pay $5,000 of the down payment, so I enjoyed some cash back too!

    • Travis Pizel says:

      That’s a crazy low interest rate, Alex…sometimes they really will do almost anything to sell a car, right? Thanks for sharing!

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