…And a Sick New Year’s Too!

Yikes, we had one heck of a vacation. As regular readers already know, we had a sick baby over Christmas – leaving us with no sleep and lots of family parties to attend. And then on top of that our family car had the transmission go just a couple days later. This is actually the second car to have a busted transmission in the past few months (my winter beater, a 2002 Dodge Neon went back in September). Then my wife and I managed to come down with the cold our son had, and we went car shopping and took delivery of a new car on the day of a huge winter storm!

Needless to say, things didn’t go as planned.

Seeing as I espouse frugality and avoiding debt, the fact we bought a new car may strike you as odd. Or at least against the normal advice. And I agree partially, but I figured I’d go through the thought process here.

Why New?

First the car that just died: It’s a 2008 Nissan Altima and it’s the only registered and licensed car we have on the road. Or it was. It’s just shy of 79k miles and the transmission is shot. We’re not real thrilled about that. I did some searching and it appears that there were some problems with the CVT motors for that model and Nissan has since extended a longer term powertrain warranty for it – but sadly we have a standard transmission and get no such extended warranty. So at the very end of five years, and just 18,800 miles past the powertrain warranty, the car went kaput. We do plan on replacing the transmission (yuck) and making it my new “beater” car.

This is the second car to have transmission troubles. My 2002 Dodge Neon with ~120k miles on it went to the auto graveyard with the same issue. That was a bit more expected, and I was able to get a good 4 years out of that car with about $3700 spent over that lifespan, which was good enough for me.

But obviously the fact that we had two cars with transmission troubles played a large role in our next decision: to buy a new car. Or to be more specific to buy a new crossover SUV – the Mazda CX-5.

The fact of the matter is that you can save a lot of money buying used. But when I weighed out our emotions regarding losing two cars to powertrain issues recently and researching prices on used crossover SUVs – taking the leap to buy new felt OK to us. The reality of it is that when I looked at used SUV prices they didn’t depreciate rapidly (unless you bought luxury). That standard line about how cars drop some huge amount when you drive off the lot? Turns out that’s not always the case nowadays. From my experience the large price drops come when the warranties expire, which is the one thing we really wanted. We could go out and get an SUV for $16,000, but it’d be out of warranty and have 50,000+ miles on it already. We just couldn’t take that leap of faith. We also plan to keep the SUV for a good decade or so, and we wanted something large enough to accommodate our growing family (currently two adults, one baby, one medium/large sized dog).

So I’ll be the first to admit it: We did not go frugal and we bought new. We definitely could have gotten away with buying an older used SUV and taken the savings to hold in reserve in case we had any major issue down the line and still have some extra money in our accounts. But we didn’t. We wanted to splurge a little. We wanted to feel safe knowing any issues in the first three years would be taken care of, and any major issues in the first five would be too. And we just wanted something nice, let’s admit it.

Why Finance?

A number of the car companies were offering up year end incentives for new car buyers which typically included low interest rate financing. In particular, I received a 60-month 0.9% APR loan. I recall there being a big argument over at Debt Roundup over using debt to buy a car, but the reality of it is that leveraging debt can be a large tool in increasing your net worth. I could certainly sell off some stocks in my brokerage account and pay cash for the car, but I’ve been given nearly “free money” to pay the loan off over five years and keep my money invested. The simple math here is that I am gambling that I can beat 0.9% keeping my money in the market. I’d say that’s a very conservative target to beat. The other way to look at this is that I currently hold three mortgages, each of which has a much higher interest rate than the car loan (3.75-6.75%). I can avoid selling stocks to pay off the car, and shift using that money over to pay towards the highest interest rate mortgage.

Now granted, increasing my monthly expenses and holding onto debt is not something I’d want to do long term, but the reality of holding a 0.9% five year car loan and using my money to instead accelerate payments on a 6.75% mortgage, or even invest, is a wiser move.

3 thoughts on “…And a Sick New Year’s Too!

  1. Oh yes, I remember that debate well. I got many angry emails about my decision, but those people forgot that my decision was based on pure math and my circumstances. I get why you did it. You got practically free money to buy a car. Yes, you bought a new car, but you are paying very little for the luxury of financing. You should certainly beat the 0.9% rate in the market. Hell, one of my checking accounts gets more than that in interest. I think you did what was right for you. Thanks for the mention by the way!

    • I think that so many financial bloggers and readers come from the side of being in debt and therefore have the mindset of eradicating debt at all costs. While that’s a great mindset to have in terms of higher interest debts – the use of loans with good terms in a major tool in helping people get ahead in life. Just from a pure debt standpoint, if I can trade off paying cash on the car for a 0.9% loan and instead use that cash towards my 6.75% rental mortgage it’s a no-brainer. The more difficult to reconcile part of the equation is new versus used cars, which people tend not to get bogged down into the details of as much.

  2. Pingback: Simple Savings Sunday #7 – Saving While Paying Off Debt | Debt RoundUp

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