Mr. W. and I currently have a car loan with a $10,000 balance. I know that most personal finance gurus would advise paying down that loan ASAP to avoid interest charges. We could pay off the loan in its entirety, but we've decided not to do so. Here are some background details that explain our decision:
In August of 2012, we bought Mr. W.'s used Honda Civic. At $16,000 and less than 20,000 miles, it was a great deal. When we bought the car, our wedding was just six weeks away. We hadn't planned to buy a car until after the wedding, but Mr. W. was in an accident that made his previous car un-drivable (no one was injured, thank goodness). We tried to share a car for a few weeks, but this doubled his already-too-long commute. Mr. W. clearly needed a new car.
Other than assorted wedding-related deposits, the car was our first major joint expense. We had the funds to pay cash for the car, our wedding, and our honeymoon. However, we decided to put 20% down on the car and finance the rest. Between the wedding and honeymoon, 2012 was shaping up to be a very expensive year. Now we were buying a car, as well.
Before buying the Civic, Mr. W. and I agreed that we should maintain a certain level of savings. We just didn't feel comfortable draining our savings completely. Marriage would bring a lot of firsts for us: first time we lived together, first time we combined our finances, first time we had to share closet space and a bathroom. On top of all those changes, we didn't want to stretch ourselves too thin financially.
At the time, $12,000 seemed like a reasonable amount of cash to have on hand. We ensured that after making the down payment on the car and paying for all wedding/honeymoon expenses, we would still have $12,000. Since getting married, we've increased our savings goal to $25,000. This amount would cover our fixed living expenses for approximately one year.
Why did we determine to save a year's worth of expenses? Why not just six or nine months? Mr. W. and I both work in relatively specific industries. If either -- or both -- of us were to lose our jobs, it could take some time before we found another position. Given the uncertain job market, we decided to prioritize increasing our nest egg rather than paying down our car loan ASAP. We make the monthly payments, but we're not trying to pay off the car until we've built our nest egg. To us, the peace of mind is worth the 4.6% interest rate.
How do you feel about car loans? Unwise, or a necessary evil?