To Borrow or Not to Borrow. . .

An interesting discussion around our house today, involving car loans.

First, let me say that "pre" broke I was average person and looked on car loans as "normal." I purchased a brand new vehicle in the fall of 2002 and assumed I would pay on that loan for five years and then trade in the car for a new one. That was normal. That is, more or less, what my parents had always done. What most people always do.

Then, of course, when the "broke" days came, there was refinancing, which extended the loan a few more years. . .and there was a lot of reading about the "evils" of owing anyone money, and how car loans weren't always "normal."

Dave Ramsey preaches that you can go your entire life without making a car payment and those were words I took to heart. I read it so much and I absorbed it all and I never really questioned it.

Honestly, I didn't have a lot of options. With my new loan, my car wouldn't be paid off until 2010, and, after my bankruptcy I knew my auto loan interest rate would be cringe-worthy until 2016, at least.

So, I followed Dave's advice, I put every penny I could find toward my car, and I ended up paying it off early -- early from the original loan, not just the refinanced version. After that, well, it took me another year to start making those pretend car payments to myself, but eventually I got on board, and now part of my monthly savings deposit is earmarked as the new car fund.

Last year, I had some car trouble. A few small things - A leaking fuel filter that led me to think my gas mileage was going away until it was discovered. The need for an anti-freeze flush led me to several months with no heat until after I was up to speed on the highway.

Then, a leaking intake gasket was discovered and quoted at high dollar prices.

I got worried. I thought: It's time for a new car. I have the choice now, do I trade it in for something that might not be any better, but which would leave me with no car payment? Do I fall back into the world of car payments? Do I use my small "new car fund" to repair this one and hope it lasts?

I wanted to do what I knew Dave would tell us to do. But I really didn't want to drive a beater!

In the end, I went with option number three, made the repairs, and was once again in love with my trusty car.

Then it got hit. I came out of the house one morning to find someone had backed into it's side and I could not even open the driver-side door. Insurance took care of the damage (less my high-deductible). The next month, my new policy came, with a 60% increase in annual premiums, thanks to that hit-and-run.

I got angry and I got worried at the same time. I didn't want to pay that much for stupid insurance, but every stupid auto insurance agency had the same rates. I had a recent claim, after all.

I made the decision to get rid of my comprehensive coverage. I saved myself a few hundred dollars, and I just have to take a deep breath and recognize that, should another accident happen, with no other driver to blame, I have to repair the car myself, or scrap it and buy another.

So, coming from this perspective, but having had good luck with the car for about a year (including my epic road trip from Omaha to Maine and back again, where my baby averaged nearly 25mpg), I commented today that I had hopes this car would last me until I had enough saved for a "nice" car, so I wouldn't have to fret about buying a questionable car versus having a payment.

Well, wasn't I floored?

He says, "I don't think I would ever want to pay for a car up front. I mean, what would happen if you got in a wreck and totalled it that first week? You'd be out all that money."

What???

Insurance will still pay the value of the car.

"But the value of the car dropped the moment you bought it, so it's not going to pay it all back. You'd be out some."

Same thing on a loan though...you would just owe the loan company and not have a car. Right?

This led to a bit of a debate by two people who weren't overly informed on the subject, which led me to read about gap coverage (which is optional in most states, by the way, and not something that's automatically included).

(It also led me to this interesting article regarding "diminished value" resulting from a car accident....one more thing I had never thought about.)

I found this article over at Bankrate, regarding auto depreciation but since its from 2002, it's not the most timely article.

This graphic from Edmunds was more timely, although it still doesn't answer the question swirling in my mind: How Fast Does A New Car Lose Value

Then, I finally found this article, Drive a (Nearly) New Car for (Almost) Free

Which I think backs up the point that was in my mind that I couldn't just say because I didn't want to be wrong.

If I buy a car that is one or two years old, (paying cash), and its a decent, low-mileage car, there will not BE the immediate drop off in value, and, even if I hit a deer leaving the parking lot after signing the papers, I will not be out the 10-20% of the value, as I would be if I had purchased a new car, with an auto loan.

Phew!

(No one tell him how much he made me think, with this one!)