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?