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?
This article is about Ask the Readers, Cars, Choices, Real-Life
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Something similiar happened to us. We talked to the body shop about cheap options to make our paid-off car drivable again (of course that might not be possible in all accidents). We spent around $1000 replacing the trunk, tail lights, and bumper with junk yard parts. Unfortunately, the bumper was red and our car was green!!
We then put the extra insurance money–an additional $2000–to pay down debt.
We have been driving our “beater” for over a year now. It’s humbling to drive. But it’s also a great motivator to get out of debt and save for a better car.
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Beware of the Auto Loan
An auto loan is probably one of the easiest loans to get. Auto loans are secured by the vehicle being purchased. They also require a down payment which brings down the cost of the loan.
They are easy to get because they are secured and most lenders assume that a person will not want to risk losing their new vehicle to repossession by defaulting on the loan. Additionally, repossessing the vehicle is pretty easy for the lender so they always get some pay off in the end.
The problem with auto loans is they can be too easy to get. Most people do little more then provide some basic financial information and go through a credit check to get one. People do not really shop around and therefore they do not always get the best terms. You might be paying way more than your new wheels are worth and you might be missing out on a better available deal.
Vehicles depreciate rapidly so be sure you aren’t paying too much for your car by not taking the time to shop around for the best loan deal possible.
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This kind of thoughtful, real-world personal financial question is why I enjoy reading Get Rich Slowly.
With the economy where it is right now–and where? it’s heading–these kinds of dilemmas are bound to be facing more and more people.
This particular post made me reflect on my own spending in relation to my debt elimination program.
In other words, every penny does count.
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If you can do without the car and at $4.00+ for gas, not to mention insurance, don’t buy the car. You can if need be rent a car for a day or two (Enterprise will deliver and pick-up).
Another possibility (probably not for a rear-ender as there will most likely be extensive frame damage..) is to buy back the salvage and replace some junk-yard parts. Couldn’t tell, but on the GEO in the photo above, it looks like a door and fender. You can search on Car-Parts.com by make, model location and **price**… Then email for color if you really care.
Lastly, lets face it, there really should be a lot of cheap used cars right now.
Thx jegan
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I, too, think J.D. is right. Try a few weeks on one car, see how crazy it is and then decide.
We went to one car + scooter a few months ago, and it’s been great, but a good scooter won’t save you money initially — ours cost more than our Volvo 740! The scooter is good on gas, so we are recouping our investment slowly.
I noticed someone recommended buying a Volvo, and I would say don’t do it unless you know a Volvo mechanic. Other mechanics might be well-meaning, but Volvos are a different animal and we had a lot of stupid repair bills that didn’t fix anything.
It’s a hard decision, and I wish you luck. Much kudos for the sacrifices you are making to pay down debt, and I hope you find a good solution.
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I’ve always been taught not to waste too much money on a car as it only depreciates in value. So if you can get away with 1 car, that would be great. You can pay of your debt and get the satisfaction of not wasting your money on paying interests.
Cheers,
theKimsta
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A car is a liability. She should use this opportunity to get rid of both cars and get her husband to change jobs.
Fuel, insurance, maintenance, all for little benefit. A car is a great way to insure you never get rich.
If you are in a business that you absolutely NEED a car, you had better be getting paid BIG TIME. I’m talking several hundred thousand dollars a year. And you should be trying to negotiate with the company that they pay for it.
I do not put liabilities on my balance sheet.
Ever.
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I would just like to comment on some of the posters on here.
People, she asked for advice about if she should get another car or not. Period.
Not if she should sell her land, change her monthly budget, get a new job, or (for gosh sakes people!) completely move to another city! (I have NO IDEA how that particular plan is supposed to not cost her more than the $4000 that she is working with!)
GET A GRIP PEOPLE!! This is Get Rich SLOWLY!!! Not “Sell Everything You Own And Live In The Park In A Large Tree Reusing Other Peoples Trash, Just So You Can Not Have A Credit Card Balance”!
Most people come here (including me) to find realistic ways to improve their situation in the life they are living now. I worry that people will stop coming here to get ideas if they get told to sell their house every time they get in a fender bender!
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LOL… Ditto what Rachel (#108) said!
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I’d really like to see the details of how Sean (post 107) has arranged his life.
He could make a killing for himself showing individuals and businesses how to never put a liability on their balance sheet! Not to mention I’d LOVE to hear how millions of people are doing it wrong by having to drive to their jobs.
And here’s a thought — pizza delivery people absolutely need a car for their jobs. Hmm, they must be getting paid hundreds of thousands!!! Not.
April, re your situation — I think I’d bank the money for now and not put it towards anything, but earmark it for a car. Then wait til you’ve got the other (non-real estate) debt paid off. Then find a good car when/if you reach the point of deciding you need a second one. If you never do, I’d keep it for replacing the first car.
Oh, and SELL THAT BIKE and add that to your car budget.
P.S. – My experience when I bought a $2000 car(over a decade ago, I don’t know what sort of car you’re going to get for that these days), was that I almost immediately had to sink over $500 into it for repairs and I continually had to pay for repairs over the time I owned the car. It was a POS. (I even tried repairing it myself to save money, which was a disaster and resulted in spending money first on parts, a Chilton’s manual and tools, and then on a mechanic to fix my mess.)
After 10 years of $750-$1500 annually spent on car repairs, I bought a more expensive car when I could afford it (which I’ve been driving for 7 years.) My experience has been that I’ve needed 3 repair jobs in the $500 range since I’ve had it, but I’ve spent far less keeping the car running day to day.
I’m just saying. I for one will never again go for the cheap car. When you look at my numbers side by side, the costs will come out to be fairly equivalent.
Oh, and to be honest about it, I financed the expensive car and paid it off in full in about 18 months, well ahead of schedule.
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Oh, and Rachel, be prepared. You’ll probably have to sink a chunk of that money into paying off the existing car loan. They aren’t going to write that off just because the car is totalled. I’d do that first.
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I came across this video about self insuring yourself on a car and how to eventually build a system through your own savings that will pay for your car for life. Here is a link to it on You Tube
It’s actually pretty facinating.
http://www.youtube.com/watch?v=OYHCzfPeldE&eurl=http://www.bradgoode.typepad.com/
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I had a very similar experience two years ago when my car was totalled in a highway crash (oncoming driver fell asleep and crossed the line). The insurance company gave me $,6000 Cdn for my fully-paid-off 10-year-old Civic.
I had just quit my job and was going back to school, and a new car (and starting in debt before classes even started) was NOT in my plan.
I vowed to spend no more than the $6000 cheque, and scoured the AutoTrader, eventually buying a $5,000 car – a 1971 VW Beetle. Impractical? As it has turned out, no. The only major thing I’ve had to replace was the starter, last summer, which was only a few hundred. I found the right mechanic to service it, it runs great, and we’re famous in our neighbourhood for our funky car!
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@April: When do you plan to build? I got the impression (perhaps wrongly) that the land in question is a lot on which you plan to build at some distant future date.
The issue I am raising is that buying land on which you “expect” to build at some indeterminate date in the future is generally a bad idea. Investments in land are risky, especially if such investments cause your holdings to lack adequate diversification. Lots of things can go wrong with undeveloped land, such as changes in zoning laws or building codes, change in property tax rates, change in surrounding uses (e.g., a nuisance use could be placed near your land), etc. These sorts of things have the potential to seriously impair the value of your investment. Obviously, I don’t know anything about your particular piece of land or your investment portfolio, so I am only speaking in generalities. I do know, however, that you would face less investment risk if, instead of carrying a mortgage on a piece of undeveloped land, you invested your equity in a diversified portfolio (after paying off the credit card balance). I certainly would never buy a plot of land before I needed it (i.e., before I was ready to begin the development process) if I owed $8,000 on a credit card.
Think about it this way. You have, in effect, borrowed $8,000 on a credit card to buy land that (I’m guessing) you won’t actually need until some unknowable date in the future. Does that sound like a good idea? Not to me.
Just my $0.02.
By the way, “under water” is just another slang term referring to property secured by a mortgage loan that exceeds the value of the property.
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@Rachel, yes, April did ask a seemingly limited scoped question; however, financial decisions cannot be done in a vacuum without taking into consideration someone’s entire financial picture. PERIOD. If you think it can, then I think you are misdirected in your thinking about finances. Maybe many people will disagree with me, but I don’t think any financial recommendation should be made without asking a person their entire financial position or a person giving their entire financial position. To do otherwise isn’t serving the person well.
When 25% of your income is being spent on something that isn’t currently usable and when you have other debt that consumes 65% and 10% consuming living expenses and you have no savings and are thinking about going further into debt although you could resolve your debt status because you would no longer be spending 25% of income on land and you have equity in that land, I’m not sure how not recommending selling the land is a poor recommendation to April’s situation. doing without a car resolves only one problem about not needing to buy a second car, but doesn’t reduce the existing debt or increase her ability to save money to give her a retirement savings, emergency fund, or construction savings.
i think these forums are great for getting recommendations that you haven’t necessarily thought of or maybe getting a swift dose of reality. if someone is offended by a reality check, then i think that person probably won’t do what is necessary to get out of debt. someone recommended getting a different job. it’s a good suggestion, but may not be viable or feasible in the person’s situation. someone else mentioned changing budget. well, if you are spending lots on something that isn’t needed, how is this a bad suggestion? sometimes people should sell everything that they have in order to get out of debt, because they have too much stuff they don’t need and because the stuff is costing them more than they can afford. you don’t get rich or at least getting out of debt, by having debt while holding onto stuff that you don’t need. if April can manage to get a replacement car, pay off her debts, save at least an emergency fund, continue to pay the land and save for land construction, etc within the current income limits, then more power to her, but the numbers seem not to add up (at least from the tidbits she has posted).
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@Tim–You still don’t have our financial picture right, but thanks for running all of the numbers. Again, I said the payment was UNDER 25 percent. I’m not listing our income because I only wanted opinions on buying a car versus going it with one car.
Our credit card debt will be paid in seven months, if not much sooner from the insurance money. After that, we’ll be saving well over $1000 each month. We have a small emergency fund, and we’ve began to fund our IRAs. I get a 403b at work, which my company pays into whether I contribute or not.
Again, selling the land is going to take longer than it will for us to be out of debt, based on average days on market. I’m sorry that I can’t include every detail of our decision-making and finances, but Rachel is right, I only wanted to know people’s thoughts on buying another car versus going it with one. To make so many assumptions based on the information I chose to provide is kind of pointless.
@db–My husband’s car was paid off already.
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My wife’s car was totaled in an accident last December, and we reluctantly decided to share my car. It’s inconvenient at times, but by depositing the insurance proceeds we’ve been able to avoid increasing our debt.
She still wants her own car so hopefully we’ll be able to do so when finances allow.
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@April, i understand you only wanted a black and white answer on one aspect of your finances; however, it is affected by and has an affect on other aspects of your finances. unfortunately for you asking whether you should buy something on debt when you have debt (that was at least the basic premise of your original question) and asking it in a vacuum without providing your total financial picture is pointless and not to your benefit. it’s unfortunate that you do not appear to realize this. it doesn’t matter to me whether you keep the land or not or whether the land is costing you 25% or under 25%., let alone whether you get out of debt or not.
i hope i’m wrong, but you are continuing to set yourself up for failure in your personal finances, because you have no wiggle room in your finances, you are basing your assessments off of one solution and based off an ideal scenario. as you already know from the car accident, life isn’t an ideal situation. for example,
if the one car scenario doesn’t work out, you pay off your credit card with the proceeds from your insurance claim, and even though you may keep $1k for emergency fund, then what? you have no wiggle room again, you haven’t solved your car need problem nor your debt problem.
if the one car scenario doesn’t work out, you pay half of your credit card off and buy the used, older jeep cherokee, you still have no wiggle room. the jeep sucks gas, it’s an older car, the more miles the greater probability of maintenance requirements, etc. you haven’t factored that into your budget, so then what?
you decide to buy a replacement car taking out a loan, you now have increased debt again, so then what?
you are correct, it is pointless for me to continue asking for information that you are unwilling to provide, so it is even more pointless to provide any realistic recommendation, so I’ll stop at this. hope the ideal scenario works out.
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@Tim – You said:
“if April can manage to get a replacement car, pay off her debts, save at least an emergency fund, continue to pay the land and save for land construction, etc within the current income limits, then more power to her.”
We’ll be there before the year is out, in addition to funding our IRAs. Our financial picture is really not so dire.
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coupla things:
1) I live rent-free too, but I don’t live with my parents; I’m a house-sitter!
2) old Honda Civics aren’t really great ideas because they’re super-popular with street racers and prices are high for what they are. Finding a stock (meaning no racer-boy mods) one that’s in good shape and reasonably-priced will be hard. There’s plenty of other options.
3) hybrids: the price spread between a base Civic and the hybrid model is enormous, almost $10,000. that difference will buy you a hell of a lot of gas, even more if you buy a used $3-4,000 car. people who go into debt to buy a new hybrid under the pretense of saving money on fuel really need to go back and take some math classes. If you really probe it’s about having a new car and feeling all virtuous, not saving gas and money.
4) Volvo 240: totally, esp. a wagon. get a stickshift if you can find one as otherwise these things are dogs and get relatively crappy gas mileage.
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@Tim – You really need to leave her alone now, you’re extremely overbearing.
@April – JD has it right, and good luck with your dream home!
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@Cal, I believe my last post stated I would stop posting suggestions to her. yup, i’m really very overbearing, when I have nothing to gain or lose in her getting out of debt. I conclude by focusing your attention to her statements in the original post and asking how any of what I posted is overbearing and off the mark relative to her statements:
“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.”
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I agree with deferring the decision. One and half years ago my husbands car conked out. We decided to try out one car for a month and see how it goes. It is still obviously working.
Sometimes it is a pain in the arse, but once you get used to it’s not that much of a hassle. We also make payments to ourselves so that if we need to buy another car, or a different car, we can purchase it with out acquiring more debt.
It may work, but you’ll never know if you don’t try.
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Couple of comments on the comments….
1) The trial period sounds great. The thing is not to get yourself in a situation where you HAVE to buy a car and finance it immediately, because that’s how people get hurt the worst in car deals. I’d have a plan in place in case you have to buy a car with little notice.
2) Please be careful about buying cars on Craigslist. There’s no feedback or accountability at all, and there are even stories of people getting hurt when they go to look at a car. Treat it like an internet date, meet to view the car somewhere public, and (as with any used car) pay the money to get a professional mechanic’s opinion of the car’s condition.
3) My own Volvo 240 was a money sink with one thing or another always going wrong. I’d never get another one. Obviously, YMMV.
4) I do agree there are some great cars out there for $4000 and under. Especially if you go for brands that are less high-profile, you can find some great deals.
Whatever you decide, good luck!
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