If smart money management were just about math or opening the highest interest savings account, this stuff would be easy. But there are a variety of complex factors that come into play when we have to make financial decisions. For example, Alyssa wrote recently to ask for advice. She needs to buy a car at the end of the summer, but she doesn’t know whether to take out a loan or pay cash. Here’s her story:

In college, I bought a car I couldn’t afford. One thing led to another, I moved back home, couldn’t afford to make the payments, and defaulted. The car was repossessed in November of 2007. I struggled to pay off this (and other) debt for two long years, until I finally made my last payment in November of this year.

Living without a car has been tough, but I manage. Traveling by foot and bike hasn’t proven to be inadequate until recently, when I was accepted to the nearest university, about an hour away. (I live in a small town north of Jacksonville, called Fernandina, and the college is in Jacksonville.) It’s pretty obvious that I can’t walk or bike, and I can’t move closer to school because my work is here in Fernandina. I need a car! Here’s the dilemma…

Since I’ve been piling extra money into paying off my debt, I haven’t saved much. In fact, in the past year I’ve only managed to save $1000. I make $1000 a month, more or less, and my monthly expenses — including rent, utilities, food, and my phone — sit at about $700.

I need a car no later than August. Should I save up money throughout the summer and try to buy a car outright? Or should I bite the bullet and try for another car loan? I know that because I’m more educated, I can make the right decision. I don’t need a new car. I don’t need nice leather seats, automatic windows, cruise control, etc. I just need something that will last: two hours, three to five days a week for school is a lot of driving.

This is a tough question. Though I don’t think it’s a good idea for Alyssa to take out a car loan in this situation, her timeline is tight. She may not have a choice. With a $300 monthly cash flow and only four months to save, she’ll probably only have about $1,000 to buy a car if she doesn’t make any changes.

My top recommendation is for Alyssa to buckle down this summer, cutting expenses ruthlessly and doing what she can to make extra money. (She might, for example, take a second job.) It might not be fun, but it’s only temporary. And if she can increase her cash flow to $500 a month, she’d have $2,000 for a car in August. If she can boost her cash flow to $750 a month, she’d have $3,000.

I’m not keen on a car loan because I’m afraid school will bring new, unexpected expenses, and that these will make it difficult for Alyssa to make car payments, even if the loan is small. Still, she may not have another option.

Whatever she does, I think Alyssa should make it a goal to purchase a cheap, reliable used car. She has plenty of time to do research on the makes and models that will offer the best value, so she should make a point of being as prepared as possible when it comes time to make the purchase. She might, for example, go to her local public library to pick up a copy of the Consumer Reports car-buying guide. (Or a subscription to the CR site costs something like $20 per year.) Beater Review might be a good source for information, too.

What tips can you give Alyssa? Would you take out a car loan in this case? Or should she save and pay cash for whatever she can afford? What can you tell her about shopping for a reliable used vehicle? Any models she should watch for? Models she should avoid? What would you do if you were in her situation?

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