We have car news! We bought a new – to us – car. Actually, we bought it a year ago, but we now have the title in hand, so it’s truly ours now. If you’ve been reading this blog for a while, you know I was a fan of my Honda Civic. But at 20 years old and with 225,000 miles on it, and with our second baby on the way, we had decided it might be time to replace it. So last year, just before our second son was born, we bought a 2009 Mazda5. We had been shopping on Craigslist for about six months prior to making the purchase. We had our “car account” at ING that we had been funding for over a year, and we had about $5000 in it at the time that we decided to replace our car. We had additional savings that were not earmarked for a car, and we debated whether or not to dig into that account to pay for a new vehicle.
I wrote out a pros and cons sheet. I like doing things like that.
I talked to our credit union to find out what sort of interest rate we’d get on a loan. Then I calculated the total interest we’d pay over the life of the loan, and the total interest we’d pay if we paid off the loan in one year instead of three. (I just used a mortgage calculator that lets you see how extra payments impact the life of the loan).
We had initially been looking at vehicles that cost $5000 or less, in order to just use the money in our car fund and be done with it. But the more we talked about it, the more we decided maybe we wanted something a bit newer that was still under warranty. We wanted something with room for our kids and dog and whatever gear we needed to haul, but we also wanted something that was good on gas. The Mazda5 jumped out at us as the perfect compromise between a car and a minivan. Sliding doors (awesome), seating for six, and lots of cargo space in the back if you’re only using the middle row of seats. Plus, I’ve averaged over 30 mpg (city/highway combined) every single time I’ve filled the tank in the year that we’ve had the car (I focus on gas mileage when I drive, so my numbers are always better than what a car is rated for. I go about 68 on the interstate, and in town I avoid hard braking and try to plan ahead to allow myself to coast up to lights as much as possible, etc. )
Anyway, we paid $14,000 for our car. It was two years old and had about 40,000 miles on it. It’s under warranty until 60,000 miles. We’ve put 7,000 miles on it in the past 14 months, so we should have another two years of warranty coverage at this rate (That’s all of our driving – we still have my husband’s 22-year-old car, but we’ve probably put less than 200 miles on it in the past year. We could get rid of it, but it’s a cheap backup vehicle that costs very little to register and insure).
So back to paying for the car. After much research and discussion, we decided to finance $10,000 of the purchase price. We took $4000 from our car account for a down payment. We saved the other thousand in that account to use for registration, insurance – which we upgraded to full coverage for the first time ever – and to have just in case other miscellaneous expenses came up. Then we financed the other $10,000 through our credit union at 4.5% interest (better than the dealership could offer us on a used vehicle).
Our plan was to pay off the loan in 12 months. It ended up taking us 14 months, although the last couple payments were quite small, and the interest charge the final month was about two dollars. Over the course of the loan, we paid $227 in interest. Back when we were considering financing the vehicle, I had calculated roughly $215 in interest charges if we paid off the loan in a year, so it came pretty close to our expectations.
Once we had decided that we wanted to buy a newer vehicle that cost more than what we had in our car account, we figured we had three options. One was to keep funding the car account and wait until we had the money to pay the whole price outright. Two was to raid our other savings account and pay for the car outright, which would have cleaned out most of the account. It’s much more robust these days since we’ve changed our mortgage payoff strategy, but that wasn’t the case a year ago. The third option was to finance part of the purchase and pay off the loan as quickly as possible. Once we calculated that it would cost us just north of $200 to finance the money for a year, we decided that was worth it to us. It allowed us to have a newer, more reliable, safer vehicle before our baby arrived, and the additional interest wasn’t a budget-busting amount.
Once the loan balance got down to the last couple thousand dollars, the total monthly interest charges were very low. So the last few months, we prioritized our municipal bond fund over the car loan – which is why it took a couple extra months to pay off the balance. But it’s paid off now, and we have the title in hand. That feels good. And the $227? Totally worth it. I gotta say, after eight years of driving my old Honda, the Mazda might as well be a Mercedes as far as I’m concerned. I know that it’s safer for our family, and I like that too. We’re able to fit two additional people in our car now too, which has been nice when we’ve had out-of-town visitors (like my in-laws) who arrived by plane. And all winter long, every time I went to town for groceries, I brought home 15 2x4s in our Mazda. They fit just perfectly down the middle between the seats. I probably brought home 200 2x4s that way, and my husband was able to finish framing our basement a few months ago. The car has been a good little work-horse.
Anyway, now we’re back to having only a mortgage on the debt side of the account balance. I definitely like it better that way. But I’m glad we got our car when we did, and I consider the interest payments well worth the benefit we’ve had from having the car over the past year. I had always been opposed to the idea of financing any depreciating asset, but when I wrote out my pros/cons sheet on this one, I was convinced that this was the way to go. Of course a big part of the strategy was to pay off the loan as quickly as possible, especially in the early months when the outstanding balance was highest (the first month, our interest payment was around $35).
We plan to keep this car for a very long time. Given the fact that we had our 20-year-old Honda until it hit 225,000 miles, and how little we drive, I’d say we’ll still have the Mazda when our boys get to high school. The Honda had 182,000 miles on it when we bought it, and we kept it for eight years. Given that our Mazda was practically brand new (40,000 miles – I had never had a car with only five digits on the odometer!), I think it will serve us well for many years.
Have you ever financed a car? Would you in the future? If you had asked me that two years ago, I’d have said no on both counts. But this ended up working out very well for us. I doubt we’ll ever finance another car, given that we’re still contributing automatically to our car savings account and are probably many years out from needing to buy a car again. But this experience did make me consider loans in a slightly different light. Rather than my usual “all debt is bad and I’m allergic to interest payments” attitude, our car-buying process made me think of the interest payments as the price we paid for having our car a year earlier than we would have if we had waited until we could pay for it outright. To us, it was worth it.