It’s a move that made sense for me.
- When you finance a car, you’ll often pay interest on your auto loan.
- That’s a route I chose to take despite having money in my savings to buy my car outright.
Years ago, when I got pregnant with twins, I realized the trusty Toyota Camry I was used to driving wasn’t going to cut it. I had a two-year-old at the time, and I knew that he’d only be three by the time the new babies arrived. That meant needing three car seats — something my Camry couldn’t accommodate.
As such, I began test-driving minivans (despite swearing earlier in life that I’d never drive one) because that seemed like the logical choice. And thankfully, back then, there were no car shortages like there are today, so I was able to not only find a model I liked, but snag a decent price on it thanks to my husband’s negotiating skills (I know nothing about cars and was , admittedly, useless in that regard).
Meanwhile, at the time of our minivan purchase, we had enough money in our savings account to cover its cost outright and still leave ourselves with a nice chunk of cash on hand for unplanned bills, like home repairs. But even though we didn’t have to take out an auto loan, we opted to do so for one big reason.
It’s all about liquidity
When we talk about personal liquidity, we’re referring to the extent to which you have access to cash. Many of us have assets that are more and less liquid. Stocks, for example, are pretty liquid, because you can sell them when you want for cash. Homes, by contrast, are less liquid, because it can take a long time to sell a home and convert it to cash.
Meanwhile, having cash on hand is something that gives me comfort in general. But it’s also something I insisted on having at a time when I was bringing a pair of babies into the mix.
I knew that once I had my twins, I’d have to scale back on work substantially for a number of months. And I also didn’t know what expenses those twins would bring. As such, I didn’t want to remove a huge chunk of money from my savings, and my husband agreed with me.
But that’s not the only reason we chose to finance our car. Since we both had great credit at the time, we qualified for a really low interest rate on an auto loan. And that made it so that the interest we wound up paying on our loan was minimal.
Also, we only took out a three-year auto loan. Some people pay their cars off over a lengthier period of time, but a shorter loan term generally lends to lower interest payments all in.
A smart choice
Although I don’t love the fact that I drive a minivan (I mean, let’s face it — it’s just not the coolest car), I have to admit that it was the right choice for us. My family has taken many different road trips since purchasing that vehicle, and having the extra room has definitely paid off.
At the same time, I’m glad we made the decision to finance our car rather than pay for it outright. Having extra cash in the bank kept me calm at a time when our bills for diapers, wipes, and infant supplies were soaring and I was barely able to do any writing.
Generally, it’s a good idea to keep your debt to a minimum. But in some situations, like ours, borrowing does make sense. That’s something to keep in mind if you’re torn between taking out a loan and maintaining better liquidity or emptying out your bank account and hoping for the best.
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