Ask the Readers: Should I Take Out a Loan to Buy a Car?
Published on - May 14th, 2010 (by J.D. Roth) 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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If there are extenuating circumstances we don’t know about that would require her to keep living where she currently is, then I say add as much extra cash to that already saved $1K, and try to buy the best used vehicle possible with whatever money is saved up. A motorcycle/scooter in Florida sounds practical and fun. There just isn’t enough excess in the monthly cash flow for a car loan. Moving to the college town and getting a job there sounds easy but may not be.
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if you do end up with cash for a clunker, I highly recommend old Volvos. safe, durable, and costs me about $200 every six months to insure (in the Portland area.)
last March I bought a 1988 Volvo 240 wagon with ~165k miles for $1100. had to put almost that much into it to fix it up, but I should be able to drive it into the ground (or at least til I pay off my student loans in another year or two.)
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I would tell Alyssa to bust her behind this summer to make every penny she can, but still take out the loan.
If she can save $2000, she can take out a lona for $3K, get a nicer car (for $5K), and have a minimal monthly payment.
Just one man’s opinion…
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My wife and I were just in a similar dilemma. She had a car loan that she couldn’t afford and defaulted on before we were married. Since then she just walked to work. However, our new apartment is on the other side of town and walking is no longer feasible. Our timeline is actually tighter because we signed the lease 2 weeks ago and move in in three.
We had roughly the same amount of money saved and I did look for a private-sale used car first. We just couldn’t find one in our price range that I felt would be reliable enough for my wife to use as a daily commuter on her 30 mile round-trip.
Instead, we found a small dealership that would double a $500 down payment, which allowed us to save $500 to pay off the loan faster, and bought a 96 Cirrus for $7000, with payments of $200/month. It’s not ideal, and it makes money a little tighter than we would ideally like, but it’s better than her breaking down on the way to work in 6 months.
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She needs to move closer. It’s not worth driving 2 hours a day to keep a $12,000 a year job.
What I want to know is, is she going to this University for free? I sure as heck hope so. As far as I know, Jacksonville doesn’t have any schools worth taking out loans to attend. Everyone thinks that student loan debt is “good debt” but that’s only if you’re getting a degree that’s worth something.
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I leased a car when I was in a precarious situation because I HATE mechanics (had just divorced one, actually) and it was the least expensive option for the most reliable car. That being said, her mileage situation would make that prohibitive.
I’d vote for moving and getting a job near school if possible or delaying a year (which seems like a lifetime when you’re young).
If the job is the only/main reason for staying in town, then seek to replace that. If family is the main reason, see if they can help out financially or if they can’t, that’s a good reason to stick around a year (meaning if they’re not in a position to help maybe you’re helping them or just want to be around them). If it’s to stay in town because of friends/boyfriend/girlfriend or whatever…put school first for now, working and school you won’t have much time for them anyway. If that seems inconceivable, you may not be all that committed to your schooling and the drudgery of the the commute and school and work might make you less than successful in one or more areas. (Not that I’m speaking from personal experience or anything
)
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First of all, congratulations on getting out of debt and going back to school!
I second what Jean said at #80 – talk to someone at your school. There is an office for helping students with stuff like this. You might be able to get a better job so you can relocate closer; you might be able to contact a student to ride with; or they might be able to adjust your financial aid package to make this all more possible. School loans are going to be better financing than a car loan, no matter your credit.
In terms of succeeding at school, it’s almost always better to be closer. It just cuts out one barrier to getting there – if you can live on campus, even if it’s more expensive, it can make the difference between succeeding and not succeeding. Closer to campus is better than farther away.
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@Edward: Not sure the best way to say this, but I show KBB retail (that’s dealership) value for a 96 Cirrus with everything (leather, sun roof, etc) to be $4600. Looks like that dealer might have taken you to the cleaners because of your situation.
I just bought a ’99 Acura RL with power everything, leather seats and a moon roof for $6K from a wholesale dealer. We did buy with cash though.
@Alyssa: YES, as has been mentioned previously, talk to the financial aid office at your school! You would be surprised at the money/aid they hold back in reserve, and the squeaky wheel gets the grease. They might have a good solution for you, and at the very least, you’ll have more information on your options. Good luck!
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@Missy:
Thanks. While its upsetting to hear that we overpaid by 50%, at the end of the day, she has a reliable car that I’m not going to have to worry about, and finally something that is going to build her credit after her bankruptcy
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@Edward: That’s a good way to look at it — not what it might be worth, but what it is worth to you. We lived with a crappy Ford Focus base model for 8 years because it was worth it to us not to have to spend money on a different car.
J.D., I suppose this kind of issue (rebuilding credit costs $$) should be a part of the elusive “bankrupt” article we’ve been discussing in comments.
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@Edward:
Did you just call a 14-year old North American car “reliable?”
I’d love to hear if your opinion changes in 6 months. No offense, but I suspect you’re going to have quite a few problems with that car over the next couple of years.
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I’d agree that, if moving is truly not an option for whatever reason, a good used car is the best way to go.
I purchased a wonderful old clunker for $2k in high school and drove it for almost a decade, through college and beyond. When repairs finally got to be too much, and moved on to another used car (had it for 4 years and no real repair bills yet!).
Never underestimate the staying power of a good used car!
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I wish Alyssa luck, and I don’t know about used car values in Florida. I do know about used car prices and availability in our part of Michigan. She wouldn’t be able to touch a decent, fairly low mileage used car for much less than $5000. I know because I have a 17 year old trying to buy a used car. The cash for clunkers program wiped out the mid-price used car market around here. And Alyssa is not going to be looking for a clunker, not with a 2 hour commute each day. Thats a lot of miles in a week/month. She may be looking at repair bills just a few months into the commute. And whats she going to drive while the cars is in the shop?
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No math needed here. Alyssa should buy outright what she can afford. She can always trade up later when she can afford bigger and better. No need to repeat history . . .
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