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: December 18th, 2009 | Author: Joe | Filed under: Debt | Tags: Car Buying | 2 Comments »
This post was originally written at the start of 2009, but has been lost on my PC until now, so I thought I’d share with you now.
My wife and I just bought a new minivan, and I thought I’d share some of the lessons I learned along the way.
Get your financial house in order before you even think about buying a car.
I realize that this is not always possible, but it is ideal, so if you know you’ll need a new car in the next few years, start planning now! Make sure you pay down as much existing debt as you can, and free up as much extra cash as you can. If you can save enough money to buy a car outright, then make sure you are setting enough aside each month to meet that goal. Otherwise, figure out how much you can afford in monthly payments.
Make sure your credit is squeaky clean, unless you’re buying outright with cash.
Ok, you should probably keep your credit score as high as possible anyway, but especially if you are going to finance any amount on a car. Knowing your credit score can give you an edge when rate shopping. My last car loan was for 10%! That was about 10 years ago. I was young and foolish and didn’t give a thought to my credit score – and I paid for it. I was determined not to make the same mistake twice, and spent 3 years getting my score up from 650 to 820 and it has paid off.
Line up financing outside the dealer, at least to get another opinion if not a better deal.
Every dealer will finance a loan. For some dealers, it’s the main way they make money. Many deal with local banks and credit unions, and tack on anywhere up to an extra percentage point or two. Cut out the middle man and go straight to the bank. This is what I did, and the dealer I eventually went with used the same credit union I went through, but it would have been 5.875 % instead of the 4.99% I got by going straight to the credit union myself!
Do the math to see if cashback or ultra low interest (0-1%) is the better deal.
Car makers and dealers are offering incentives like never before, but that doesn’t mean it’s a good deal. For example, when we were looking for minivans we saw many offers up to $7,000 off or 0% financing. The catch was that this was only on 2009 or brand new 2008 models. That would have meant we would still spend as much as $4,000 more than on a used 2008 after the cashback! I also ran the numbers on the financing and discovered that at 4.99% even on a 5 year loan, it would have been better to take the cash back because the total interest saved by going with a 0% loan was around $2,300. Bankrate offers a handy calculator for determining this. http://www.bankrate.com/brm/calc/rebatecalc.asp
Shop around for the best price.
Duh, right? Everybody knows to do this, but I’m surprised at how few use the Internet for their searching. We used Auto trader (through Kelley Blue Book) and found half a dozen dealers with models in our price range. The great thing about this is that dealers often offer the best deals over the Internet because they save money on advertising and getting the buyer into the lot in the first place. Low overhead means less markup, when it’s coupled with competition.
Visit Kelley Blue Book and Edmund’s for fair prices
Know what the fair price is before the salesman spins his yarn. This is not only valuable during the negotiation phase, but it can help you tell which dealers are trying to take you for a ride. You can research this and more at http://www.kbb.com and http://www.edmunds.com/
Sometimes you really are getting a good deal, especially in bad economic times.
My wife and I spent a couple days searching the web and Kelley Blue Book before we contacted a dealer. We actually contacted 6 and had them compete for our business through auto trader. We knew the fair asking price and we knew the tricks that dealers use to get consumers to pay more. We went out to the dealers for test drives, prepared to do battle. In the end, we went with the first dealer we met with because they offered the best deal. We couldn’t believe that it was as good a deal as it seemed and tried haggling the price down, only to have the car we were originally interested in get sold out form under us! So, we had to settle for our second choice, which was still the best deal around and only 4,000 mile more than our 1st choice.
In the end, we got a 2008 Dodge Grand Caravan with 24,000 miles on it for $10,000 less than the invoice price on a new 2008.
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Posted: August 5th, 2009 | Author: Joe | Filed under: spending | Tags: Car Buying, Cash for Clunkers, Donations, Used Cars | 8 Comments »
Before President Obama’s Car Allowance Rebate System (A.K.A. “Cash for Clunkers“) program, people typically had two choices of what to do with their clunker: Trade it in at the dealer for a couple hundred bucks, or donate it to charity for a tax write off. Now, buyers have a third option: trade it in for up to $4,500 tax credit. Well, just because the cash for clunkers program has come along, doesn’t mean it’s a no brainer to choose that option.
Here’s a break down of when each option may be the right choice:
Cash for Clunkers:
Qualified consumers will receive a credit of $3,500 or $4,500 for an eligible trade-in toward the purchase of lease of an approved vehicle under CARS Program. Here’s how to qualify:
- The vehicle must be less than 25 years old when you trade it in.
- You must buy or lease a new vehicles (buying another used car does not count).
- Your trade-in vehicle must get 18 or less MPG.
- Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in.
- Program runs through Nov 1, 2009 or when the funds are exhausted, whichever comes first.
Typical trade-in:
Here’s how a typical trade-in usually works.
- Dealer provides a fair market value for the vehicle.
- This trade-in value is usually subtracted from the total cost of the new purchase.
- Trade-in value may be subtracted from a new or used car purchase.
Donation to Charity:
It used to be that you could write off the fair market value of your clunker on your taxes, but that changed in 2005. Since the 2005 changes, here are the restrictions:
- For cars valued at more than $500, the deduction is limited to the amount the charity sells the car for at auction.
- You must attach a statement of sale to your tax return when claiming the deduction.
- Charity must be a qualified 501(c)(3) charity
- your deduction cannot exceed 50% of your adjusted gross income.
- For cars valued less than $500, you may claim a deduction for the lesser of the vehicle’s fair market value on the date of the contribution, or $500, provided you get a written acknowledgment fromthe charity that complies with the requirements describedunder Written Acknowledgment For a VehicleContribution Deduction of $500 or Less.
Which is The best choice?
Cash for Clunks is best if:
- Your trade-in has a fuel economy of less than 18 mpg
- You’re looking to buy or lease a new car in the next month or two
- Your trade-in is valued at less than $4,500.
Typical trade-in is best if:
- You’re looking to buy after November
- Your trade-in has gets better than 18 mpg
- You’re looking to buy a used car.
- Your trade-in has a fair market value of over $4,500
Donation to charity if:
- Your trade-in is valued at close to $500 (the charity probably won’t get much more than this at auction)
- You’re buying a used car
- Your trade-in is over 25 years old
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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.
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