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Staying away from car debt is great. But not at the expense of siphoning off all of your savings. Here’s why one writer regretted a car purchase made in cash.
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Years ago, I was hunting for a used SUV to replace my wife’s old sedan. Her salmon-colored 1994 Lincoln Town Car was undoubtedly a sight to behold, but with broken power windows and an out-of-commission air conditioner, it was far beyond its prime.
I scoured the internet for weeks to find a suitable replacement and finally landed on a used SUV that I thought was a great fit for my family. Tons of space? Check! Within budget? Check! Too good to be true? TBD. I thought it was perfect, though, especially since it was priced at about $8,000 — the amount I had in my savings account at the time.
If memory serves me correctly (and it’s doing less of that these days) I paid for the SUV initially with an auto loan or even put the amount on a credit card, but within days, I drained my savings account and put all my cash toward paying off the car.
I patted myself on the back for not taking on any debt. Then, I quickly realized how bad it is not to have any extra cash for emergencies.
The car was a dud, and so were my finances
The SUV worked fine for a while, but it slowly became clear that the engine had problems. It randomly wouldn’t start, leaving my wife temporarily stranded until the vehicle decided it did, in fact, want to turn on.
It was only annoying at first, but the mechanical problems eventually got worse. At the same time, draining our savings to pay for the SUV made our financial situation more difficult than it needed to be.
Thankfully, we could still cover routine maintenance and car insurance expenses for the vehicle, but there were times when money was much tighter than it would have been if we hadn’t spent all of our money on the vehicle.
There was no wiggle room for unexpected home repairs, and we had no extra cash for major emergencies. We kept the SUV for a few years, but eventually had to sell it because of its odd mechanical problems, and I didn’t have the patience — or money — to find out what they were.
What I did differently the next time
I replaced yet another used car a few years ago, but this time I took a different approach. I made a down payment of several thousand dollars toward the vehicle, then financed the rest with an auto loan with the intent of paying it off early.
Even with the loan, I made sure that my monthly car payments were very manageable and that I could easily afford the insurance and any maintenance costs that might pop up.
My goal was to pay off the loan early, which we did by making additional payments and putting any extra money we received toward the loan. Thankfully, this approach worked far better than our previous car-buying experience, and we were able to pay off the car two years early.
Keep a savings cushion no matter what you do
For some people, paying for a car all in cash can still be a good idea. Doing so can help you avoid debt, and with interest rates still elevated, you can save a lot by not taking out an auto loan.
But whether you go that route or choose to use a loan, make sure you leave some money in your bank account. Having at least $1,000 in your savings could go a long way toward handling financial emergencies.
And if you’re finding it difficult to manage your current car payments, consider either selling the car and buying a cheaper one or finding other ways to reduce costs. For example, car insurance prices rose 19% over the past year, so shopping for a different car insurance company might help you significantly reduce that expense.
However you decide to pay for your next car, take it from me and leave a little extra cash in your account if you can. Oh, and if the price of the vehicle you’re about to buy seems too good to be true, well, you know why.
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