When I bought my car (the one that is currently not being driven) in 2008, I needed to borrow $3,500 on top of the $1,000 I had saved to pay the private seller. However, I ended up taking out a loan for $5,000. Why in the world would I take on more debt than was necessary?
First, I need to explain that I was in a little different mindset in 2008 than I am now. I thought taking out a car loan was a reasonable thing to do. As I said, I only had about $1000 available (and NO emergency fund!) to put toward the car but I wanted one worth a little more than that. Our plan for our next car is to pay for it in cash and not compromise our financial stability to do so. But, back in 2008…
I knew that when I moved from Rockville, MD to Durham, NC for grad school I would need to buy a car. I researched Durham and assessed that by choosing to live in a safer part of town I would have to give up the car-free lifestyle I had enjoyed in the DC area. I did some light research into the best used car models available and decided that my first choice of vehicle would be a Toyota Echo. In the summer months I started searching for Echos in used car dealerships and from private sellers all over the East Coast. It turns out there weren’t a lot available! So I waited. While I waited, I moved to Durham and borrowed one of my parents’ cars for the interim.
Finally, the perfect Echo appeared on Craigslist from a seller in VA. It was a 2002 with relatively low mileage and the seller had listed it for below its value because of some cosmetic damage. Through some email exchanges, I negotiated a price for the car ($4,500) and arranged that my mother would go check out the car and buy it for me, since the seller lived close to my parents. I just had to secure the financing.
I researched interest rates for auto loans and went to the local bank that offered the best ones. After getting quite far into the loan application process, we hit a snag: Because the car was being sold by a private party out of state, the bank would not be able to issue me the loan. There was nothing that bank could do for me.
I sought out the local bank with the next-lowest interest rates and told them up front the information that had prevented the previous bank from issuing me a loan. This bank didn’t have a problem giving me an unsecured loan to take across state lines to give the seller. However, they would not issue me a loan for $3,500 – the smallest loan they issued was $5,000! Given that I wanted the loan from that bank, I had no choice but to accept the larger amount. I made sure there was no penalty for paying the loan off ahead of schedule.
Everything worked out and my mother bought the car on my behalf. I transferred the $4,500 to her and the extra $1,500 sat in my checking account. I was itching to get rid of it. I hated thinking that I had such a large loan and was afraid that some crazy error would cause me to lose it. I had to wait a few weeks for my account with the lender to be set up to accept payments, and I sent the extra $1,500 back with my first scheduled withdrawal. I ended up paying off the loan early and the car has been mine free and clear for years!
I guess the lesson I learned from this is truly that cash is king! I don’t want to have to jump through these hoops and meet silly requirements to have access to money – I’d rather just have my own.
Have you ever been faced with a weird situation involving a loan? Do you think there is something else I should have done?
photo from ansonchappell