Need a car. What would you do?

DrMrs2B · October 2013

My husband and I just moved to a new state/town. We have an extra $6000/month currently. He is not working, but substitute teaches when able. We are currently sharing a car, but that makes it very difficult for him to accept a job unless it is within walking distance, because we have a daughter in another school and my job is not within walking distance. Usually he drops me off at work early and I end up having to stay there a couple hours late until my daughter is done with her sports practices. This is not working well for us, but we can probably stick it out for a few more months. We will have to rent a car for a couple out-of-town trips in the next few weeks because only one of us is going.

I do not really want to finance a vehicle. We are currently paying off some bad credit card debt and student loan debt. The credit card will be paid off in 4 months if we keep living like we are, with him not contributing to the income (which would be about $500/week if he could work as much as he is asked to work). Our student loans will be completely paid off in 6 years and we plan to purchase a home in 2-3 years. This is all figured in to the above mentioned budget.

What would you do? Purchase a <$6000 car with high mileage with cash now to get us by? We would then take 5 months to pay off credit card debt. This would give us a better lifestyle now, and we know we would basically have to eat the cost of that vehicle when it died in a year or two. Also, we would probably have to put more money into repairs/tires/etc. Or would you put all extra money toward credit card payments and finance a better car in a couple months when our credit score is better (after credit card payed off)? We would plan to purchase a car that we would keep for the next 8 years. These are our two options we discussed with our financial planner. Both will cost about the same in the long-run. Any other ideas?

MommyLiberty5013 · October 2013

Is the $6k the extra money you have? Do you also have an emergency fund or is the $6k it?

Is there a family member who would loan you a car?

DrMrs2B · October 2013

The $6000/month is what we have beyond our budgeted expenses. We are budgeting money into building an emergency fund. Our rent, savings for down payment on a house, etc. are all figured into the budget. The $6000 is what is left over. So if we do not spend it on a car, we will be using it to pay down our credit card debt, then our student loan debt. So essentially to pay off our credit card, then afford a $25,000 vehicle that we would like to have, it will take about 8 months. We do not have anyone to loan us a car.

hoffse · October 2013

Honestly?

1) Send that extra $6,000/month to credit card debt

2) Then finance the car

Or,

1) Finance the car

2) Then send $5600/month extra to credit card debt, since you will now have a car payment

And reassess your need for a $25,000 car - the $18,000 civics/sonatas/corollas are just fine and will last you more than 10 years. In fact, go to a place like carmax where somebody else has taken the initial 20% depreciation hit. And then buy that civic/sonata/corolla.

And then finally, pre-pay student loans only after your retirement and other savings are funded. Seriously, the interest rates are not that high.

OK, I admit. I seem to be more open to debt than many on these boards. But that's because I think it's fine to finance things if you get a better return by investing the cash you aren't sinking into a depreciating asset (ahem: the car) by paying cash for that depreciating asset just to be able to say you're debt-free or whatever. Now if you can't afford the monthly payment, that's another thing entirely. But here, you can.

Here's the other thing - if your credit scores need to improve to finance the car, paying down CC debt won't immediately give you a huge bump up. It usually takes a few months for your credit scores to adjust. It sounds like you can't last that long. So if it were me, I'd probably go ahead and finance the car - but not the $25,000 car, the <$18,000 car - and then aggressively pay down CC debt before turning my attention to savings.

DrMrs2B · October 2013

My retirement savings is already maxed-out with my monthly payments, so that is not an issue. We also have a health savings account, so that is not an issue either.

Our student loan debt is unfortunately astronomical! So even though our interest rate is not that high, the actual dollar amount paid is extremely high if we don't get it paid off in a timely fashion.

Thanks for the thought about the smaller, less expensive vehicle. I was thinking around $25,000 because we would like it to last 8 years and by then we will hopefully have a larger family...so we were thinking a used crossover vehicle would be a good option.

Our credit score isn't so bad that we can't finance a car. Even though our debt is high, our debt-to-income ratio is pretty decent. Our financial planner advised us that in 2 months, we should be able to get it down to around 25% of our maximum credit and that should be reflected in a boost in our credit score in about 4 months. Is this true? I've never really had to think about it before, but I assume financing a car would affect our credit score when applying for a home loan in a couple years.

Maybe we should just finance a car now with the shortest repayment plan available. Aaaagghhh...I just hate owing money!

hoffse · October 2013

Owing money is frustrating, yes, but I suggest trying to get a bit more zen about it. H and I also have astronomical student debt - like in the $200K-ish range from law school - we've decided to be aggressive with it but not let it ruin our lives by sending every spare penny that way. We are not spendy people (in fact, we are both incredibly cheap on the whole), so we've decided to make peace with the 7-10 year repayment schedule instead of killing ourselves to shave off a few more months. It would ultimately make us pretty unhappy to restrict the few luxuries we do allow ourselves - for me, the occasional pedicure, for H the occasional round of golf - and we don't have to live that way. It's just not worth it to us, especially when we're going to finish paying down those loans 20 years earlier than our lawyer friends will anyway.

Even if you have retirement and an e-fund taken care of, you might want to use some of this spare cash to build wealth, save for your house down payment (and all the other costs associated with that), etc. instead of funneling it all toward student loans. Don't get me wrong, do pre-pay to some degree, but I generally don't agree with sending all your extra cash that direction. I know I'm in the minority on this, but I think the general advice about paying down student debt doesn't always account for professional school or large undergraduate loans. At some point you have to live life - buy a house or condo, have a baby, take a trip - just do these things responsibly. It's not reasonable to put your life on hold so that you can be student debt-free before taking those steps.

Here's a great pre-payment calculator that has helped H and I figure out how much we want to pre-pay and how much we want to hold back for other investments and goals (like a house):

http://www.decisionaide.com/mpcalculators/extrapaymentscalculator/ExtraPayments1.asp

Re: cars - I drive a crossover and admittedly love it, but it doesn't have much more space than a regular sedan. It just has a hatch back. The frames on a cross-over are the same as sedans. To get considerably more space you need to be looking at SUVs... and those are going to cost a pretty penny.

Yes your financial adviser is correct. As for financing the car relative to buying a house, a bank will look at your total monthly obligations vs. your gross income. They also count current balances on credit cards in your debt cocktail, even if you pay those balances off in full each month. So if you charge everything to get points (like me), going cash for a couple months before the bank inquires into your debt situation will make you look less risky, and you might (just might) get a lower interest rate that way. But it will be very small, if at all.

Financing a car will probably help your credit score, if you make your payments on time. It's a different kind of debt than credit card debt (term loan vs. revolving credit), and the credit reporting companies like to see a mix. Right now, the credit card debt is probably dinging your credit report more than anything else. That's because it not only shows delinquent payments, it also reduces your available credit each month. In general, you want to be using less than 10% -ish of your available credit on credit cards each month (combined) - so when you carry a balance this typically will make you go over that number.

I wouldn't lose sleep over the car negatively affecting your credit, though. At worst, it will ding it when the initial inquiry happens (then that recovers within a few months), and it will increase your debt-to-income ratio. But I would bet that once your credit cards are paid off, they will offset the debt of the car. Credit card balances are the real monster on a credit report.

Just my $0.02.

cordsniper · October 2013

Buy an inexpensive 2 year old car. Focus on paying off your student loans and getting 6 months of an emergency fund together, especially if only one income is coming in.

maple2 · October 2013

We purchased a used Sonata for around $12,000 that still had their great warranty. There is a program whereby employees of Hyundai can drive their cars for up to a year or so, so the cars are "used" but they haven't been owned by anyone other than Hyundai so they still qualify for the warranty. You might be able to find similar high quality barely used cars that are much cheaper than new ones.

Since you already have a good amount of savings, another financing option for you might be borrowing against your own money. I don't know if all banks offer this plan, but the basic idea is that you invest the amount of your loan in a fixed term cd. The bank then charges you a nominal interest rate (when we did it the rate was .05%) above what you earn on the cd. You still make payments like a regular loan, but the interest rate is really low. On the downside, all that money of yours that is collatoral isn't earning any interest. You'd have to weight those trade-offs to see if it was worth it for you.

DrMrs2B · October 2013

Thanks so much for the replies!

Wulfgar · October 2013

I would buy a $6000 car now with cash and make sure that it is one of those that can get to 200k miles. This will give you at least a few years of driving it before you need to replace it.

I use to go through $1200 cars in about 18 months driving roughly 40k miles a year.

Jokerkat12 · October 2013

My husband and I were recently in a similar situation. We were sharing 1 car and trying to drop each other off at work. It was exhausting!

We wound up getting a Prius C. They're extremely safe and surprisingly affordable!!!

We got our Prius C Model 2 for $19,000 brand new off the lot with 0% interest for 3 years. Our payments are around $300/mo and our gas bill has been cut in half which basically pays for the car.

Food for thought. It's a really good buy, I love how it handles, and it's a great commuter car!

Janessadawn · October 2013

DON'T buy a brand-new car. The huge depreciation hit isn't worth it.

What about buying a car in good condition for between $10k-$15k, putting the $6k down, and financing whatever's left over above $6k? The monthly payment would be small and you could pay it off early, when you're done paying the credit card.

jtmh2012 · November 2013

DrMrs2B said:

I've never really had to think about it before, but I assume financing a car would affect our credit score when applying for a home loan in a couple years.

Here's something to think about. Yes, having the car will affect the amount that the bank lets you borrow when you go to take out the loan, but that's a good thing. You don't want your house loan to be so high that you become "house poor". Most home loans are 15-yr or 30-yr obligations assuming you actually stay long enough to pay the home off. Sometime during that time, you're going to need to probably buy another car. As for your credit score, I just bought a car in June and just talked to the bank this week about a home loan. The guy was amazed at how good my credit looked and was willing to offer me way more than I considered prudent.

Also, I know this goes against the car buying though on this board, but I always buy new cars in the $20k-30k range and I keep them until they die. I just got rid of a 1988 Corsica about a year ago. If you buy and keep a car, there's nothing wrong with buying new. If you're buying a car now with the idea of selling in a few years because you have to always have a "current" car, then yeah, go ahead and buy a used car to avoid the depreciation hit. But even then, buy a newer used car to avoid a lot of up front repairs.

vlagrl29 · November 2013

The car I currently have and have been driving the last 10 years I bought new for $15,000 at the dealership. I didn't even think I could qualify to buy because I was still in college teaching music lessons on the side and that was it. I got 0% financing with 0 money down. I wouldn't do that now. I think the next car I buy will be used but just will a small number of miles on it. I wouldn't want to buy a car too old because I want it to last awhile again.

hoffse · November 2013

I'll admit, even though I advise people to buy used (especially if they are worried about debt), it's not something I ever do. H and I buy new, more to get safety perks than anything else. The last couple years some of the fancy safety technology has trickled down to less expensive cars, but you can't get it unless you're willing to buy new or almost new. We keep cars for about 10 years, which is just long enough for the safety improvements to have made pretty big leaps by the time we're ready to buy again.

I can't believe I'm saying this, but it's just money. I sort of view buying the safest car in my price range like buying insurance. I really hope I don't need it, but I'm willing to break some of my really cheap inclinations and take the plunge, even if it does mean I take the hit with depreciation instead of somebody else because of how it times out with the model/year. Driving is the most dangerous thing most of us do any given day. If it saves my life, my H's life, or a passenger's life, then to me it's worth it.

That said, I think you have to balance keeping finances in line vs. having lane assist, you know? But if we're talking about getting a car with airbags all around, vs. a car that doesn't have that feature, I would spend the money and get the extra airbags. Buy used if you can, but don't compromise safety too much.

jtmh2012 · November 2013

vlagrl29 said:

I got 0% financing with 0 money down. I wouldn't do that now.

I bought my last car with a 0% and $0 money down. Borrowing other people's money for free is the best deal you can have. Now the rest of your money is hopefully sitting in an investment somewhere making you more money.

hoffse · November 2013

jtmh2012 said:

vlagrl29 said:

I got 0% financing with 0 money down. I wouldn't do that now.
I bought my last car with a 0% and $0 money down. Borrowing other people's money for free is the best deal you can have. Now the rest of your money is hopefully sitting in an investment somewhere making you more money.

That's true, but only if you aren't spending it. I read articles like this, and I question that premise:

http://www.bankrate.com/finance/consumer-index/credit-card-debt-hits-all-incomes-big-and-small.aspx

Xstatic3333 · November 2013

I bought my car new as well. Why? My previous car was totaled (not my fault, everyone ok) while still in good shape, so with the settlement I was able to finance a new Honda Fit for four years at only 140/month. I could pay it off quicker but will be snowballing worse debts instead. At the time my DAILY commute was 120 miles, so I needed crazy reliability and awesome gas mileage. I plan to keep it as long as it works, which should well over 200,000 miles.

Now OP, I'd say the $6000 car could make more sense for your H. If he'll only be driving in-town to work, that's plenty. A $6000 used Corolla or Civic is still a quite decent car. My next car will probably be "lightly used" myself. I hate paying for new, but I live a pretty high-mileage lifestyle, even though the commute is now down to 50 miles (hooray!).

jtmh2012 · November 2013

hoffse said:

jtmh2012 said:

vlagrl29 said:

I got 0% financing with 0 money down. I wouldn't do that now.
I bought my last car with a 0% and $0 money down. Borrowing other people's money for free is the best deal you can have. Now the rest of your money is hopefully sitting in an investment somewhere making you more money.

That's true, but only if you aren't spending it. I read articles like this, and I question that premise:

http://www.bankrate.com/finance/consumer-index/credit-card-debt-hits-all-incomes-big-and-small.aspx

In my case, my credit cards get paid in full every month. I used them to get the points for stuff I'm buying anyway. If I don't have it in my checking account, it doesn't get charged. Beyond that, the only "debt" I have is a car loan and a house loan. Both are paid ahead of their payment schedule.

jtmh2012 · November 2013

hoffse said:

jtmh2012 said:

vlagrl29 said:

I got 0% financing with 0 money down. I wouldn't do that now.
I bought my last car with a 0% and $0 money down. Borrowing other people's money for free is the best deal you can have. Now the rest of your money is hopefully sitting in an investment somewhere making you more money.

That's true, but only if you aren't spending it. I read articles like this, and I question that premise:

http://www.bankrate.com/finance/consumer-index/credit-card-debt-hits-all-incomes-big-and-small.aspx

In my case, my credit cards get paid in full every month. I used them to get the points for stuff I'm buying anyway. If I don't have it in my checking account, it doesn't get charged. Beyond that, the only "debt" I have is a car loan and a house loan. Both are paid ahead of their payment schedule.

Need a car. What would you do?

Re: Need a car. What would you do?

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