Posted: August 9th, 2011 | Author: Joe | Filed under: Saving, Tips | Tags: Auto loans, Buying a car, Car loans, Financing, loans | No Comments »
It’s a well known “secret” that the average American cannot afford a new car . That article focuses mostly on the fact that people borrow way more than they should when buying a new car. But this post is about buying a car outright – with no financing. Very few people can afford to buy a new car without taking out a loan, but they would be better off if they could only figure out how to break the cycle of new car – new loan.
Matt Jabs shared his ideas on How to STOP Financing Your Vehicles at DebtFreeAdventure.com and it got me fired up on the topic again.
Regular readers already know that I learned a lot from my expensive mistake buying a car when I was younger. Mostly what I learned was how not to get entirely ripped off in the process. I thought at the time that it was used car salesmen that were out to rob you blind, but I learned that the new car salesmen can take a lot more without you ever really being aware of it – until it’s too late.
So, I learned what NOT to do when buying a new car. Years later, when my wife and I were expecting our 3rd baby and had to upsize our family vehicle, I put those lessons to work and shared a few more lessons I learned when buying a car.
But, if you click through to that last link you’ll notice while I didn’t get taken for a ride, I still had to take out a loan for the new car.
The truth of the matter is that getting off the financing treadmill is just not that easy.
Here are Matt’s 5 tips to stop financing your vehicles:
- Stop thinking you have to borrow money to buy a car.
- Aggressively pay down existing auto loans.
- Continue saving after the loan is paid off.
- Buy used.
- Save for repairs and maintenance.
To be honest, my wife and I did #2 and 3 above before we upsized our car… we just didn’t have enough time between paying off the previous loan and buying the new car, so we had to finance a good chunk of it. We also bought used. If it was just my car, I probably would have bought an even older car and financed less, but since it’s the family car and I would hate for my wife to break down in the middle of nowhere with 3 small children, we settled for a 2 year old vehicle. Most of the depreciation was over at that point also.
So, we’ve made progress in the process, but we’re not there yet. Hey, I said they were simple steps, not easy. 
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Posted: June 22nd, 2010 | Author: Joe | Filed under: Debt | Tags: Buying a car, Car Buying, Car loans, Saving Money, spending | 2 Comments »
Liz Pulliam Weston has an article on MoneyCentral about how and why A car payment is not a fact of life.
Her article is basically an update on her original formula for determining how much you should spend when purchasing a new car. Her formula is not only simple, but sensible:
“…if you can’t pay cash for your next car, you should make a down payment of at least 20%, finance the balance for four years or less and make sure the resulting payment is no more than 10% of your gross income.”
The problem with that approach is that the typical American family can’t afford the typical new car!
According to the National Automobile Dealers Association, the average price of a new car in 2009 was $28,966. Using Ms. Weston’s formula, a family income of $65,000 would be needed to afford the car (at 5.57% interest) but the average median income in 2008 was only $50,000.
Of course, another problem with the formula is that it assumes no other major household debt.
All this leads to people taking longer and longer term loans, sometimes so long that the loan ends up being more than the car is worth. By the time the car is toast, you’re stuck still owing money on it while trying to figure out how to get another car.
This is a predicament near and dear to me because I fell into that new car trap when I was fresh out of college.
But just because Weston’s approach is not easy doesn’t mean it’s worth ignoring.
It’s not easy, but it is liberating. It’s my opinion that car loans are a major source of people’s financial trouble. I can’t tell you how many homes I pass by where the car in the driveway is worth more than the dwelling! And if you think about it, it’s that desire to have the newest thing that keeps us on the income-debt treadmill.
If you can break that cycle, you can free yourself from a whole world of financial trouble.
That’s why pundits like Ramsey recommend that people by “a clunker” or otherwise minimize their expenses temporarily while they save up to afford a better car.
Check out the full article here. It has much more info – and don’t be typical!
photo by salendron
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Posted: May 19th, 2009 | Author: Joe | Filed under: spending | Tags: Buying a car, Leasing, Mistake | 2 Comments »
Regular readers of this blog know that my wife and I recently moved to a new house. Well, while unpacking the many boxes of paperwork that moved with us, I discovered a real gem from the past – my old car loan.
It was a blast from the past I didn’t want to remember..
I say it’s a gem, but like the hope diamond – it’s one I’d rather I hadn’t found. It just brought back many painfully stupid financial decision my wife and I had made in my exuberant youth. But I also realize it is a pearl of wisdom that can teach others, as well as remind myself not to make the same mistakes again. I hope you can learn from my car buying mistakes.
This is the story of how I spent $35,897 on a $23,207 car.
Mistake #1: buying today with tomorrow’s income.
It was the late 90′s, and my wife and I were a couple of DINKs . Our lives were financially free, with money to burn and the unlimited prospect of future income. We were just out of college, and knew we’d be making much more money 3 years from then. We figured we could afford whatever car we wanted. We refused to settle.
If only I could travel back in time and smack my ill informed, misguided self. Life would be a lot easier for us now, living as SIWKs, if we hadn’t wasted so much money in our younger days.
Mistake #2: Being lazy.
We did VERY little shopping around when we bought this car. What little we did was pathetic. We wanted a Subaru Outback. We were the out-doorsy type back then, and we live in a part of the country that gets serious snow in the winter and we wanted (told ourselves we needed) all wheel drive. Our “homework” consisted of test driving an Outback, and a ford escort wagon and comparing the two!
Lets’ face it – we were going to get an Outback no matter what, and this was all a pretense of being informed shoppers. But the big money mistake here was never even looking into financing. We never comparison shopped for car loans, never thought about auto rates. We got financing through the dealer!
Mistake # 3: Focusing on the wrong things.
We never shopped around for financing, and didn’t think about it. When it came to “affording” the car, we just thought about monthly payments.
That’s what this post on The Simple Dollar blog titled, If You Ask “What’s the Monthly Payment?” You’re Asking the Wrong Question is all about. We were asking the wrong question because it felt good.
Long story short, we leased the car.
Our payments were $365 per month! We spent nearly as much on that car as we spent on our rent!
Mistake #4: Not learning from past mistakes.
Since we didn’t do our homework, we never shopped for the best financing, but we also never checked our credit score. It turns out, our credit was pretty bad. My wife’s credit was practically non-existent so we had to go with mine. In the end, we accepted a loan on a brand new car for 10% interest! Never lease a car with bad credit!
The 10% interest was bad enough, but looking over this ancient relic of paperwork I realized just how bad it was. We never gave a thought to what we would do once the lease expired. It was our only car, and we panicked and bought the car.
The car sold for $23,207 new. We leased it for 3 years at 10% interest for a total of $13,142. After which we purchased the car for $14,863 total, with $4987 in financing charges for a total price of $22,745 – on a car we had already leased for 3 years!
For those of you playing along at home that’s a grand total of $35,887 on a $23,207 car over a 8 year period of time.
Conclusion.
We were lazy, and figured we were young and could afford it. We weren’t thinking about how long we’d be working for this car or how much it would really cost.
If I had invested that money in my 401k alone I’d have well over $100k – even after the recent hit from the bailout fiasco!
In the end we learned a very powerful lesson about paying attention to our finances and our credit record.
I improved my credit score by 237 points, resolved to become debt free and stay that way and will never buy a new car again!
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