I have been without a car for several years, but after a move and some lifestyle changes, I decided it was time to buy a vehicle.
I prefer to buy used cars to save money, and I had enough savings to be able to buy a car for $ 10,000 to $ 12,000 in cash and still have emergency savings. Instead, I decided to take out a car loan – even though it meant paying interest charges.
I’d rather keep my emergency savings full, especially now
If I had used my savings to buy a car, the remaining funds would only have been enough to cover three months of basic expenses. A strong emergency fund includes at least six months of basic living expenses. As a self-employed person, I prefer to keep at least that, if not more.
This is especially true in light of the pandemic. We entered a
in 2020 and I still haven’t made it out to the other side. While my job has been fairly stable lately, the global economic uncertainty we face makes me want to hold onto a generous amount of cash. With entire industries collapsing over the past year, draining half of my savings didn’t seem like the right decision to make when there were other options.
I was able to obtain a car loan with a fairly low interest rate
Before deciding whether or not to use my savings, I wanted to see what types of rates I would qualify for. I applied for about half a dozen auto loans to find the best rate. While this results in a thorough investigation of my credit report, multiple loan applications within a short period of time are usually consolidated into one investigation, so the impact was minimal.
I made sure to apply for the loan from a wide range of institutions. I applied with four
, an online lender and a few traditional banks. The online lender was the only one who turned me down. I got the best rates from the credit unions.
Thanks to my credit score, which is in the 700s, I was able to qualify for a car loan with an APR of 3.00% to 3.49% depending on the car I chose. This decently low rate consolidated my decision to finance the majority of the purchase of the car. I would have put about a third of the cost in cash.
I can always pay off the loan early to save money on interest
If I were to take a $ 10,000 loan and pay it off in five years, I would end up paying about $ 861 in interest. I plan to pay it off early, however – the same loan paid off in three years would cost me $ 517 in interest. If I can pay it back in half, I’ll only pay $ 431.
In the end, taking out that loan and depositing $ 5,000 also meant that I could get a car for $ 15,000. Buying a newer model with additional safety features actually helped me save on my monthly insurance payments, and the lower mileage means the car will last me longer or, in theory, maintain a good condition. higher resale value.
If I can cut costs and increase my income despite the recession, I can pay off the loan early and save money on interest. On the other hand, if I end up losing income, I have manageable monthly payments and lots of money in my emergency fund. While paying hundreds of dollars in interest might not seem like it was worth it to other people when I could have gotten a slightly older car in cash, it is worth it for me.