Earlier this week, April wrote with a personal finance predicament. She and her husband need to buy a car, but it’s not something they’d budgeted to do any time soon. Fate intervened:

My husband and I are trying to pay down our debt and to save money. This morning he called to tell me that he had been rear-ended in traffic. He’s fine, thankfully, but he thinks they’ll total his car, which was paid for. My best guess is that they’ll give us $4000. I don’t want another car payment, but I’m not sure what to do here.

The payments on my car are $240, and we have two years left. We pay $1013 for the lot we own [on which they plan to build a home --j.d.], and $200 for his motorcycle, which we’re trying to sell (keeping the bike isn’t an option). The rest goes toward the normal bills and paying off the credit card, which we have about $8000 left on. We don’t pay rent right now, don’t have cable, and we’re cutting back everywhere possible. Our two luxuries are Netflix and high-speed Internet.

What’s our best option?

  • Should we buy something a little more than the expected $4000 settlement and finance the rest?
  • Should we try to make it on one car and put the money toward the debt?
  • Something in between?

My husband absolutely has to have a car because he makes sales calls all day long. I carpool to work and don’t drive, but on occasion I need to take my own vehicle. Maybe we could make other arrangements on those days, but it’s hard to account for any circumstance that could come up. I want to be really smart about the choice we make, because I don’t want to derail all of our hard work. We really want this to be the year that we get our finances in order.

April adds that because of where they live, biking to work isn’t an option, and neither is public transportation. Her choice seems to be: remain a two-car family for convenience, or make a go with one car while tackling the last of the debt.

Often I don’t have a strong opinion about reader questions, but this time I know exactly what I’d do if I were in April’s situation. I’d defer the decision. I would take the money, place it in savings, and try to get by with just one car for a few weeks. If this worked well, I’d pay down the debt. If there were problems, I’d buy a car.

I actually experienced something similar several years ago. In December 2000, a tractor-trailer rig sideswiped my beloved Geo Storm during the morning commute on the freeway. My car was totaled.

I didn’t have an emergency fund and was already deep in debt. But the car was paid off. The insurance company gave me $2000 for it. Rather than make the smart move — buy a used car — I borrowed $15,000 to purchase a brand new Ford Focus, the car I’m still driving today. That choice prolonged my life in debt.

April’s situation is slightly different, of course. I had to buy a car; she and her husband have the option of using the money to pay off debt instead. But is that the best choice?

Have you had to make the choice between buying a car or paying off debt? Which did you choose and why? (Or, to look at the question from a different angle, have you ever opted not to have a car in order to avoid debt?) What would you do if you were in April’s shoes?

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