Happy New Year!
We’re only a few days into 2018, and already this year is starting off so much stronger than 2017. On January 1st, 2017, I spent the day in the emergency room, my willpower was at an all-time low, and when our 2007 Volkswagen Golf started making yet another set of weird sounds, I threw in the towel and financed the purchase of a new-to-me Subaru Crosstrek. Suddenly, after a moment of weakness, I found myself in the same situation as so many other Canadians: I once again had a car loan.
I never planned to spend 2017 with a car loan. My original plan for the year involved renovating my 84-year-old home, which, while perfectly serviceable as is, is in dire need of a new bathroom, and the attic is begging for a proper renovation to make it a livable space.
Instead, after borrowing $4,000 from my emergency fund as a down payment, I found myself in possession of an $18,500 debt at an unsavoury 5.9% interest rate. For six months I fooled myself into thinking I could do both, renovate my house and pay off my car loan, and after six months and only $7,000 paid down, I decided that doing both was boring, and it was time to tackle my debt with everything I had.
I’m a goal-oriented person, and financially I work best by focusing on a single goal at a time. Focusing on one financial priority at a time is how I managed to pay off $38,000 in two years, how I stacked a $10,000 emergency fund, and how I saved a 10% down payment for my house in a year and a half.
So in June, I decided to throw everything I had at the remaining $11,000 balance of my car loan, and over the past six months, I’ve done just that.
At the end of 2017, I paid off that car loan for good. Here’s how I did it:
I Sold My Car Myself
My husband and I are a one-car household, which meant after buying our new car, we had one car too many. The dealership offered us a pathetic $1,200 for our old car, but after sprucing it up, I was able to sell it myself for $4,000. I used to repay the $4,000 I’d borrowed from my savings for the down payment, which left just the $18,500 left to pay back.
I Ditched My Car Loan for a Line of Credit
While I did go with a car loan from the dealership initially for simplicity’s sake, the interest rate was far too high, and I knew that I needed to get that lower if I had a hope of paying it off in one year. So once the remaining balance dropped to $15,000, I moved the remainder to a line of credit at 4.7% interest.
By shifting my debt to a lower interest credit tool, I cut down the monthly interest I was paying so that more money went to paying down the principal, and less went towards interest. I also liked the idea of using a line of credit instead because, if an emergency like job loss hit, I could drop the payments down significantly, versus a car loan, where payments are fixed.
I Treated My Monthly Payment Like a Minimum Payment
The problem with having a car loan is that if you aren’t careful, it’s dangerously easy to get used to that monthly payment. You budget for it, you make it automatic, and before you know it, you’re comfortable with it. The desire to pay off a car loan fades when it becomes just another part of your finances.
To avoid this, I treated my regularly scheduled monthly payment as a minimum payment. If all else fails, I’d pay the monthly payment, but I budgeted more. The first few months of new car ownership my minimum payment through the dealership was $300. But I made payments of $505 per month and added an extra 25% of my freelance income on top of that. By adding my car payment as a bill in my Tangerine chequing account, making additional payments only took a few clicks. Later, when I made my car loan my #1 financial priority, I was paying over $700 per month towards the loan from my budgeted income, and 50% of my freelance earnings.
I Used My Savings
At the end of December, I still owed about $2,500 on my car loan. A few more months would’ve taken care of it, but I was just so sick of the loan that I pulled money from my savings and paid it off. I was aware of the emotional toll paying off this debt had taken on me, and at after a year of paying it down, I was so very over it. Instead of carrying my car loan into 2018, I finished it off, and I’ll spend the first few months of 2018 building my savings back up.
I Made Plans for Life After My Car Loan
With so many Canadians living with a car loan as a regular part of their lives, it would have been so easy to get comfortable with my loan and spend five or six (or seven or eight) years paying it off. But that’s not for me. I like keeping my monthly expenses as low as possible, and a $300 car loan doesn’t align with that value. On top of that, I’d lived car loan free for three years, so I knew how it felt to own a paid-for car, and I wanted to go back to that. I wanted that money for other things like home renovations; I didn’t want that constant drag on my finances for the next half dozen years.
Pride of Ownership
Finally, owning your vehicle just feels right. So many of the positive results of proper financial management are invisible. Being student loan free, credit card debt free, saving for retirement, having an emergency fund, you can’t see any of that. There are only a few results of sound financial management you can see. Owning a car is one of those.
Plus, I just like my car better when I own it outright. Who said personal finance doesn’t have an emotional component?