Full Debt Freedom – Our Car Loan is Paid Off

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Back in March we finished paying off our $40,000 of student loans. It was the culmination of a long journey filled with obstacles along the way. While it was a very freeing feeling, we couldn’t fully say that we were debt free because we still had $7,000 left on a car loan.

Last month, we paid off the car loan to reach full debt freedom! In total, we paid off $55,000 of debt during the last 4.5 years (November 2013 to July 2018). Reaching this point was a long time coming, and it’s an incredible feeling to no longer have any debt payments leaving our accounts each month. This lowers our baseline expenses and frees up cash flow going forward each month. We are planning to never have any non-mortgage debt for the rest of our lives!

In today’s post I want to go through the decision process we went through in purchasing our car and getting a car loan in the first place, why we held onto it for awhile, and then why we decided to get it paid off last month.

The Background Info

For part of college, my parents let me borrow their car, a 2001 Nissan Altima with about 60,000 miles. We continued to borrow it during most of our first year of marriage, but the time came when my parents needed it back. My wife and I were both commuting to work every day, in two separate directions, so the option to downsize to one vehicle wasn’t in the cards. This meant we needed to find a car to purchase, and quickly!

After paying for a wedding and honeymoon in September of 2014, and then a 6 month period of looking for a new job after my internship ended, our savings had dwindled. We had a modest emergency fund, and enough money to pay the bills, but we didn’t have more than about $3,000 in cash to comfortably put towards a vehicle. At the time, I had been working a new job for a couple months, so our income had become steady again, but we hadn’t yet built our cash savings back up.

Our Thought Process

This equation of needing a car quickly, plus not having a lot of cash on hand put us in a bit of a dilemma. This led to our decision to take on a car loan. Rather than buy a $3,000 car that would be a short-term solution, and likely lead to significant repair costs, we decided to take a short-term financial hit of taking on debt. We viewed this as a long-term solution of having a reliable vehicle and being able to build up a larger emergency fund.

Car Loan Statistics

The latest statistics I’ve seen from various sources, including cited by Financial Samurai:

• Average new car is now $34,000
• Average car loan is $30,000
• Average loan term is 5.7 years, with an average payment of $503.
• The average interest rate is about 4% for a 5 year loan.

We came in WELL below those averages. Our loan was around $15,000 for 5 years, with payments of $275 and an interest rate of 0.9%. The price tag for a new 2015 Honda Civic was around $18K, with used models coming in at only a few thousand dollars less.

Was buying used worth saving a few thousand dollars? Ultimately we opted for purchasing new, with the mindset of keeping it for 12+ years and 200,000+ miles.

The low interest rate, the long-term reliability of the make/model of car, and mindset of paying it off multiple years early, were all factors in our favor.

Analyzing the Decision

We bought a reliable car that can routinely run smoothly over 200,000 miles and is fairly inexpensive to maintain and repair. However, we took on debt and likely paid a few thousand dollars more in order to purchase a brand new vehicle.

Did we make the “right” decision? I don’t know, ultimately time will tell. Do I regret the decision? Not at all.

If we had overextended ourselves by purchasing a $35,000+ vehicle, purchased a vehicle not known for its reliability, taken on a high interest loan, or purchased a new car with much cheaper used options available, it’s likely the decision would have backfired big time and brought regret.

With the decision we made, I do know that we did the best we could with our knowledge at the time and the financial situation we were in. I also know that overanalyzing or beating ourselves up over our past decisions is no way to live life. We should learn from what we do right and wrong, look to improve, and then move on to the next decision.

Paying Off the Loan

On our list of financial priorities, paying off the car loan wasn’t a huge focus. Our number one focus was to get our student loans paid off. Not only was it a much higher interest rate, but also it was debt that felt like a burden to us. During this time we also worked on building up a bigger emergency fund and invested consistently in our 401k’s.

A few months after paying off our student loans, my wife expressed how important it was to her for us to reach full debt freedom. At that point we shifted gears and started throwing extra money towards becoming debt free once and for all. This was propelled by some settlement money we received (from a car accident we had no fault in) and selling some ESPP shares.

In the end, we paid off the $15,000 loan in 3 years, and could have paid it off sooner if we hadn’t been investing so heavily.

Personal Finance is Personal

One of the key aspects of personal finance that I continue to learn over time, is that there is almost never one right answer. Personal finance is named accordingly, it involves personal decisions based on individual circumstances. While there are certain rules that should be followed, for example “spend less than you earn,” often times it’s not so clear cut. It’s very rarely black or white, with one direction being clearly right and the other being clearly wrong.

Some may agree with the decision we made, while others will completely disagree. That’s ok. The point of this post isn’t to say we made the right decision and others should make the same. The point is that we took the knowledge we had at the time and tried to make the best long-term choice we could make for our circumstances.

Final Thoughts

Going forward, my preference will still be to buy a gently used car, in cash, and it’s what I would recommend to people if they ask for my advice. This is a widely agreed upon principle in the personal finance space, but it also may not be the perfect decision for everyone’s circumstances.

Overall, we’re proud to have reached debt freedom and will likely never get a car loan again. At the same time, we are at peace with the decision we made and are happy to have a reliable vehicle to drive for a very long time.

For more viewpoints on bloggers and car loans, check out these posts from J$ at Budgets Are Sexy and Desirae at Half Banked.

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