I bet she did get gap insurance. I am willing to bet money that whoever swindled her into this deal added all the bells and whistles.
Any one of them would love to sell you a new car if you can get a cosigner who has good credit and you have a steady job. This might not be a solution to your problem though. Your problem is probably that you don’t pay your bills on time. That has to change or nothing will get better. Even if that isn’t the case, paying your bills on time is the easiest way to improve your credit score.
Hmm, I didn’t think of it that way! I bet you’re right.
IMHO if you cannot pay the car in 3yrs or less you cannot afford it. If you can pay at that rate very few cars depreciate faster than current balance owed except possibly initially at the drive off lot.
IMHO if you cannot pay the car in 3yrs or less you cannot afford it.
That’s great if that standard is the only factor and the purchase is really discretionary. For some people, that is the only way they can afford a safe reliable car. Like the President says, life isn’t so easy when “You’re working hard to put food on your family.” Folks who struggle to make ends meet often choose between the lesser of two evils and financing a new or used car for a longer period can make the difference between buying food and diapers and ending up in a cashflow crisis. Not every financial choice is as black and white as your humble opinion might suggest.
The 25% interest is only half the problem. The people who sell these cars also price them above the fair market value. People without options can’t make good choices. I go by the pay here lots and the down payment price is what the lot pays for the vehicle at auction. If they can get a few payments, they are money ahead.
If you cannot pay cash you cannot afford it.
You spoiled old man! (me too)
But young folks often can’t afford anything without a loan. A small loan on a reliable, unglamorous used car would be best.
“But young folks often can’t afford anything without a loan. A small loan on a reliable, unglamorous used car would be best.”
I would recommend a second job before a loan of any size. I one absolutely need to borrow money to buy a car, it should be as small as possible and paid off as quickly as possible. I would also recommend living with that “unglamorous used car” until paying cash for the next car.
If you cannot pay cash you cannot afford it.
What a great idea!..that is unless you live in the real world and need a car to get to your job. In that case, your philosophy creates a chicken-and-the-egg problem.
There are plenty of decent cars(high depreciation/low desire) available for $3000-$6000. Spending $12k or well above on a brand new seriously depreciating asset with a longer term loan(3+ yrs) and barely being able to afford life necessities is a recipie for a lifetime of financial peril.
My in laws managed at likely poverty line given 5 daughters and managed to make it never with once with an auto loan. They all ate well and were all college educated to masters level. To this day they don’t spend over $3000 on vehicles that last about 3-5 years.
Spending $12k or well above on a brand new seriously depreciating asset with a longer term loan(3+ yrs) and barely being able to afford life necessities is a recipie for a lifetime of financial peril.
Really? It worked for me. Now I have a reliable car that is paid for and I also have a retirement fund that is generating compound interest because I managed my cashflow in a way that allowed me to save money for retirement at the same time. How am I in “financial peril?”
Look, I get what you are saying. Buying a used car with a short term loan saves you money on interest and depreciation. However, that is only a small part of one’s financial picture. Getting a reasonable interest rate for a five year loan on a new car might make sense in certain situations too. Life doesn’t fit into cookie cutter generalizations.
In another thread I demonstrated that if taking out a short term loan instead of a long term loan diminishes your ability to save for retirement, or if paying cash instead of taking out a loan postpones your efforts to save for retirement, you can actually loose money in the long term because of compound interest. For example, if you have a choice between a three year loan at 3.9% APR and a five year loan at 5.9% for a $10,000 car, your payments will be $294.80 or $192.86 per month respectively. Now suppose you choose the five year loan and put the extra $101.94 per month into an interest bearing 401(k) account or an IRA during that five years. With a modest 7% compound interest over the next 30 years, that $101.94 will grow to $4,690.08 (that is, if you stop saving after the car is paid off). So your plan of financing a car at 3.9% for three years instead of 5.9% for five years saves you $896.80 in interest. However, that $101.94 per month for five years left in an interest bearing account for another 25 years is worth $4,690.08.
So if we look at the opportunity of cost of saving money with compound interest over the next 30 years as an alternative to making loan payments, your way would end up costing you $3,793.28.
I agree with the philosophy that most of the time you should avoid paying interest when you can. However, saying that this is a good idea for every person in every circumstance demonstrates that you don’t appreciate opportunity cost, cashflow management, and how compound interest can affect the future value of a dollar.
Even if the amound of interest you earn annually on your savings is lower than the APR you are paying on the loan, long term compound interest will help you come out ahead if the loan enables you to save for retirement. Don’t make the mistake of being penny wise and pound foolish just becuase you don’t like paying interest. It could cost you in the long run.
This is great advice for a small number of individuals, but would cause major problems for the auto industry. Also, the prices of used cars would skyrocket as the supply dwindled and demand went up. (You Red Pinko Commie, you!!)
How many people are really without options? If you can’t afford it, get up off the couch and LEARN how to fix a used car that fits in your budget. That’s what I did for the better part of my youth and I know plenty of people who did likewise. I never once had a car loan. Too many people whine about their lot in life rather than doing something about it. And then they try to keep up with the Jones’, some even thinking they are entitled to it. I don’t buy into the “predatory lending” argument. YOU signed the papers, no one had a gun to your head. Educate yourself before you go shopping. Public libraries are free for anyone to use. Anyone can get ahead in this country, you just have to work for it and live within your means.
Ah! I found my previous post:
…if I have one dollar sitting around waiting to be spent or invested, would I be better off using it to avoid 5.9% interest payments for the next five years (saving $0.295), or would I be better off depositing it in an account that earns 9% compound interest for the next 25 years (saving $84.70)? You do the math. Even at 5% compound interest the dollar would be worth $47.727 after 25 years. Yet you would rather make the decision that saves you 30 cents than make more than $46 in compound interest. My friend, that is penny wise and pound foolish.
Let’s look at it another way. Let’s say you use that dollar to decrease the amount you borrow at 5.9% APR. That saves you $0.295. Then after the loan is paid off you put another spare dollar into your retirement account at 5% annualy compounded interest. That means you delayed making that one dollar investment for five years and it will only compound for 20 years instead of 25 years. That dollar you put in after five years will grow after 20 years to $33.066. That means that saving $0.295 in interest payments cost you $14.661 in lost compound interest that you would have earned in those additional five years. Either way you look at it, compound interest is your friend…even if your investment earns 0.9% per year LESS than the interest rate of the loan!
This must be what George W. Bush meant by “fuzzy math.”
You’re right! How dare a single mother of two complain that there is no time for working on cars! There are 24 hours in a day after all. Who needs sleep! Who needs to work! Who needs to raise children! Stupid whiners!
Actually it would not cost $4000 since you are not adjusting it back to today’s #'s. Not to burst your bubble however the $4600 would only be worth around $2300 in today’s dollars.
True, I didn’t adjust for inflation since we don’t know what the rate of inflation will be in the future and because we all know inflation exists. This is a no-brainer. Will $4,000 buy more today than it will 30 years from now? Of course it will, but it is still $4,000.
This doesn’t negate the power of compound interest. If taking a longer term loan allows you to manage your cashflow in a way that allows you to save for retirement, you still come out ahead as long as you are not close to retirement. Here is a link to a Future Value/Annuity Calculator that adjusts for inflation: http://www.nansen.net/cgi-bin/annuity.cgi If you play with it you will see that the principle that I am professing still holds true as long as you are at least 20-30 years away from retirement. Even a modest 9% growth rate will outpace inflation by a wide margin.
It comes down to choices we make in our life. Exactly who is responsible for being a single mother with two children- you, me? You sound like one of those people who likes to place blame rather than look inward at the root cause of your problems. The answer to your hypothetical situation is to run out and buy a fairly new car at 25% interest?? Is that the extent of your problem solving skills?
I’d like to believe that, but in my experience a lot of people almost qualify as non functional. Recently heard that in a neighboring state 40% don’t graduate from high school and certainly don’t think my state is any better. The function of any business is to separate people from their money, some people it is just much easier.