Buy a car or pay off debt?
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?
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There are 124 comments to "Buy a car or pay off debt?".
I like your idea of deferment. I think that I would try to make the one-car household work. If you can get by without a second car, you’re much better for it. (Think of the savings all around with insurance, gas and maintenance)
Either that or buy April a junker and give husband whatever she drives.
Try for one car! If you live in a city, on those days when you REALLY need a second car, look into flexcar arrangements (which are even hitting my part of the midwest now), a rental, or a taxi – I bet it’ll come up less often than you expect, and it’s amazing how often you can do this and still come out ahead compared to actual car payments + insurance + maintenance etc…!
I agree with you JD — since April doesn’t need the 2nd car immediately, I’d put the money into savings.
Then, I’d both put out the word that they’re looking for an inexpensive-but-reliable used car, and put the money into savings. They’re more likely to encounter a real bargain through friends than at a used car dealership. Then, for the next few weeks, she’ll figure out how much she’d need the 2nd car.
Then one of two things will probably happen:
— She’ll figure out that it’s worth the $4000+ in savings to deal with the hassles of not having a second car.
— She’ll figure out that she really needs the 2nd car, and get a deal on one through her contacts, hopefully for under $4000.
One more point — the longer she holds out on buying the 2nd car, the more money she can apply to debt. Even having the darn thing sitting in the driveway costs money: insurance, taxes, maintenance, etc.
I agree with J.D. about deferring the decision. Also, if there is going to be any profit in selling the motorcycle, I would try really hard to get it sold and apply the excess to the car fund.
The real thing though is that I get the impression that the wife hardly ever drives. Why not buy an older used car for less than $4000 to get by until the debt is gone?
I am about to oversimplify this but this may work:
Scenario One (pay debt): Interest rate on your current car loan and what you spend on gas per month now.
Scenario Two (new car): Interest rate would be on the new car loan (add that to the interest rate of your current debt). What you would spend on gas per month.
I’m know I’m overly simplifying this but what ends up being more money? I think getting a few numbers on paper may make things a little clearer.
I’m probably the wrong one to ask considering I drive a 1991 work van with 207,000 miles and zero options. I view transportation as strictly a practical matter and could easily take the money and go buy a $1,000 garage sale car, and use the remaining $3k to pay down debt.
Good move having the motorcycle up for sale!
In my experience it’s very stunting and anti-productive to try to account for every circumstance that may – or may not – come up. Deal with them when the time comes; you will find appropriate alternatives at that point in time.
I believe you can certainly make a one-car household work – we do it, and I’m not sure how, but we get by fine!
I would recommended buying a Volvo 240 DL for about $1500.00 (use $500.00 for tax, title, insurance and your first tank of gas) and then put the other $2000.00 towards debt. You definitely don’t need another car payment and these vehicles are low maint , good on gas and run forever. I got one so I could save to buy a house and have loved not having any payments. Plus the wagons have great hauling capacity and room for wet dogs without tearing up anything you REALLY care about. You can usually find a well maintained one on craigslist. These cars have a kind of classic appeal and their owners usually take good care of them. Good luck!!
I would say either put the money into savings or buy a crappy car worth $4000 or less. I wouldn’t take on more debt when you are still paying off a car loan for a car you no longer have. Pay off your debt first, then when you have saved enough buy a new car out of your own money.
I agree with deferring the decision. If they find they really have to have a second car then hubby should drive her car and they can buy an inexpensive (less than $4000) used car for her to drive the limited amount she claims that she drives. They can do this without taking on a new car payment at the very least…
I found myself in a similar situation in my 2nd year of grad school. I needed a car but had no income and was living on student loans. I bought a 10-year old, low mileage, $3,000 car off Craigslist. It’s still going strong two years later, and I’ve had no problems with it. My thinking was that cars are made pretty well nowadays and should last 10+ years and 100k+ miles. Of course there are a lot of cosmetic issues with it, but it goes, and I’ll be able to buy a better used car when I start working in the fall.
Also, I’d probably still be able to sell it for $500-$1,000 so it will have cost me about 2 grand to drive it for over two years – about $56 a month. Plus insurance is super cheap.
I agree with JD and LM. They should try out life with just the one car. Two months should be enough to tell if it’ll work out. If it does, they just halved their credit card debt. Or just gave themselves a sizable emergency fund for later.
If it doesn’t, then give the husband the existing car and buy a used one for her. If she doesn’t use a car much anyway, then there’s no need to go in more debt over it. I’m sure you can find a used car below $4,000 that can get around town. Research what the most reliable used cars are and buy one on the cheap. The goal is to get something that’ll last until they can afford a new car without crippling their finances.
I currently own a 97 grand prix (valued at around $3,000-$3,500, great cars btw). She’s getting old (11yrs and 212k miles old), but her engine is still in good shape. I know I need to get a newer car soon, but for a grand or two in maintenance I can get between 50k-100k more miles out of her. Which gives me more time to save up for a newer, better car. Some people think I should take the two grand I have now for a down payment on a better car, but in the long run this is the better option because I’ll have more money saved 50k miles from now and less debt.
Why change anything at all? I know the insurance company “totaled” the car…so what? Just talk to a local body shop (not the dealer) and ask for an estimate, then chat with your insurance adjuster. The adjuster is likely just trying to do the right thing by “totaling” it and giving you as much as possible. You mentioned that the car was rear ended…if the frame’s not bent, new panels may not cost that much, and the only other thing would be the exhaust, which is *fairly* cheap to replace (even cheaper with used parts).
I’d just repair the car and move on. If $4k isn’t enough for the repair, ask around…ask for used replacement parts. It can be done cheaply and relatively quickly without disrupting their plans.
My wife and I had been married for six years and had four children before we decided we needed a second car. Based on what you say in your post, you absolutely can make it on one car. With the money you save on insurance and taxes (not to mention car payment) you can put aside enough for cab fare or to rent a car on the rare occasions when it’s necessary.
If you DO get a car, I wouldn’t pay more than 6 or 7 grand for it – if you’re trying to get ahead financially, your cars will show it! – and I would save the money first and pay cash. If you buy through a dealer, you can usually negotiate a better deal if you aren’t financing, anyway.
I would look at it this way. Start off with assuming you dont need two cars. Also assume you dont have the $4000.
1) Figure out what your long term goals are and appropriately place the purchase of another car (new or used) in to those plans.
Figure out what that date is?
2) Ok now really thoughtfully think about how many days a year you actually need a second car? So how many days is that between now and the date where you can responsibly afford that new/used car you figured in step 1?
3) Ok now based on that you can calculate several debt scenarios…
3a) $4000 car = $4000 + insurance + maintenance (could be high) + gas
3b) More than a $4000 car = $4000 + financed amount + interest + insurance + maintenance (might…only might be lower) + gas
3c) No second car = Carpool (mostly free?) + (rental car + gas) + taxi – insurance – maintenance – gas – $4000
In the last scenario you get the nice bonus of also deducting whatever you currently pay in insurance, maintenance, and gas on the current car. Plus you’ll have $4000 to start your transportation fund.
Obviously it’s very inconvenient to not have the second car, but it’s also very inconvenient and stressful to pile up debt.
You really have to think hard about what your most important financial goals are and stay true to them.
Lastly, a car is never an investment as all it does is depreciate. You might say to yourself “but scenario 3c) leaves me with nothing of value at the end”. But really neither do the other two and you pay a lot more out of pocket.
In the end be confident in your decision and you’ll reap the benefits of financial freedom!
I’d opt for putting the money into an emergency fund and try to live with only one car for awhile. If having one car doesn’t work out, they are in the perfect situation for finding a good used car for $4,000.00. Car lots are overflowing with cars. The trick will be to find one that’s economical over the long haul.
I know the article said that keeping the motorcycle isn’t an option, but it didn’t really say why. As long as it isn’t falling apart, I’d consider the option of keeping the motorcycle and using it for transportation in place of the car that was damaged. The way I see it before the accident they had three vehicles and needed two. Now that the car totaled they’re down to two vehicles. Sure a motorcycle doesn’t work for everything (groceries might be a problem), but it will get you to and from work.
Kudos for trying to sell the motorcycle before. Now that the accident has happened maybe you should consider keeping it.
I am a self-professed car nut. And should they decide they need two cars, it is possible to get a decent car on craigslist for less than $4000. Most of the time, the ones that you find for cheap are even fun (example: there is a 1989 bmw 325e on my city’s craigslist listing that runs and is only $1000). With a little perseverance (and daily checking of listings), you can probably find something cheap, fun, AND reliable that doesn’t eat you up with insurance either. Hope that helps!
My dad’s car was “totaled” a few years back. He did get it fixed and still drives it. You can’t get comprehensive insurance again – just liability – but it works fine for him.
Eh. Let’s look at something else in this situation: I’m a little mystified by the heavy debt compounded by an unpaid-for plot of land on which they plan to add more debt to build a brand-spankin’-new-house. They’re (apparently) living at their parents to make ends meet. Should we be concentrating so much on the $70/month loan they would need to help bridge the gap on a car? Are we ignoring the mastodon in the room?
While I agree with JD on delaying making the decision, isn’t there another option? Can’t they take the payout ($4000) and buy a used car, not having to take on an extra payment. You should be able to get a pretty decent used car for $4000 and then they would be in the same position they were in pre-accident.
They absolutely should not buy a better car and go further in debt. Live on one car and use the $4k to start their emergency fund. Use the remainder to pay down debt.
If they keep the money “just in case” they need to buy a car they won’t find a creative solution. The easy way out will keep popping up.
They mention both have jobs. What else are they doing? Are they working a second job? This would accelerate the debt repayment and possibly justify (and pay for) a beater second car. Pizza delivery pays well and is flexible. Same with lawn care work. I have a friend who started a lawn care service for college beer money. It paid so well he never shut it down and now makes a killing.
You know what kills me, when I was a poor college graduate, my car was a crappy old station wagon held together by duct tape, bubblegum, and alot of hoping. It was 20 years old and barely ran, but at least I didn’t have a car payment. A guy pulls out in front of me, totally his fault, his insurance company totals my car, gives me a whopping $700 and I’m supposed to somehow get another car for that.
It should be on the insurance company to get you into a suitable replacement. It shouldn’t go by the blue book value, because a running car, no matter what condition could be worth more than that value to you. In other words, there should be a formula that accounts for more than just depreciation. I’m not saying they should have bought me a brand new car, but they should at least be responsible for getting me an equal or better replacement such that I don’t have to pay for a mistake someone else made. In my case, the next cheapest car available to me at the time was I think something like $6000, which I ended up getting a loan for.
This wouldn’t cost the insurance companies a dime either, because they would make up for it by increasing the insurance premiums of the guy who’s fault it was, something they’ll do anyway.
OK, done ranting now.
I wouldn’t go into further debt, and I wouldn’t plan on saving the money long-term. If you actively search for cars on you way to the supermarket I would see if they have any old ones for sale. Personally, I would never spend more than a couple thousand dollars on a car. I’d rather buy an old clunker and fix it up. You save lots of money that way.
I bought a new Mazda Protege in 1997 and planned to have it until it didn’t run anymore. Unfortunately, it was totalled in 2006 and I had to look for a new car. I wanted something similar (actually, I wanted the exact same car, but used Protege’s are hard to find), so got a used Honda Civic. That was right around the time I was starting to get to know someone new. He’s now my fiance, and happens to work an hour away from the house he’s going to live in with me. If it could’ve been timed just a little differently, I’d have spent some extra money and gotten a hybrid, because his commute is so long.
I’ve debated about selling my current car (which he’s going to commute with) and getting a hybrid, but from my calculations, what I’d be saving in gas down the road would just get spent up front on the higher vehicle price. And with combining our finances and my job being a little rocky, I don’t want to incur that expense up front. I shy away from vehicle financing these days … though it’s possible it could make it easier to get the hybrid. I haven’t looked at interest rates for it lately.
Absolutely defer the decision. Try living with one car for a few months to see if you can handle it. I convinced my spouse that we could live with only 1 car when we had been living with two, so we traded in both for a more expensive newer car. I was fine for the first month or so, but then I was miserable. Sharing a car works for some couples… but not for others. It was too hard for us. Ten months later, we ended up buying a second car. So where we previously had two paid-off cars, we now have two car loans. We’re chalking this one up to “live and learn.”
Only car was totaled after a deer strike $3500. Bought car back and had essential repairs done $800. Car only has cosmetic damage, but is perfectly drivable, leaving $2300 in the bank, a nice head start on the next vehicle someday. So if that rear end collision vehicle is still drivable, or could be for a fraction of the settlement, repair it, drive it, bank the rest for your next car/emergency fund.
Don’t buy a Hybrid if your goal is simply to save money. Buy an economy-size car, which will be much cheaper to begin with, and learn to “hypermile” (Google it) to give you better mileage.
I agree with the others who say to look into buying the totaled car and fix it up with the money. I had a coworker who was driving a 1992 Plymouth Sundance. He got into a wreck, the car was totaled, and he bought it back, did the bare minimum to get it running again, and drove it for another year.
I’m guessing you can probably get the car running again for less than 4 grand, and you know the car’s history.
If that isn’t an option, do this. Tally up how often you’ve actually needed a car in the last month, then calculate what it would cost to rent a car those days. Does that cost more than buying another car? If not, then get friendly with the nearest car rental place.
If it turns out you DO have to buy something, I certainly wouldn’t spend the full $4,000 on a car. Buy something reasonably reliable and inexpensive for less than $4,000 and use the balance to pay down debt. Then upgrade once you can afford to do so. Search Craigslist, as others have mentioned, but also look in the newspapers–only not in the car section. Look in the ESTATE SALE section. Estate sales are often a good source of quality, low mileage cars (the proverbial car driven by a little old lady only to church and the grocery store) and the sellers are motivated so prices tend to be good.
Texas is not a place where one can easily get by without a vehicle, and I was in a similar position late last year.
We had a $400 (that’s best case) beater that bit the dust. I only work about 5 miles from home, so a nice vehicle wasn’t a MUST. I began looking for a good $1,000-$2,000 car, since my first car only cost me $750, and I thought I’d need to account for inflation. Apparently, such a car exists only for the repair shop, or my tastes have changed. I couldn’t find anything for under $5,000 that I wanted and I didn’t even have that much money. Of course, finance terms on a decent $6,000 car was running very short term, so my payments were sky-high. If any repairs came due, we would be toast. Instead, I opted for a $10,000 truck that will be useful for many years, still had a 3 months of factory warranty on it, and, by all looks at it, appears to be a decent running vehicle. It did put us further in debt than I wanted, but, at the same time, we shouldn’t have to worry about major repairs to either vehicle for quite some time.
If I had it to do all over again, I don’t know that I’d do anything any different, but, at the same time, I don’t know that I made the right decision. That’s a hard one.
Quite possibly the right answer for April, specifically, lies in the above comments… if the $4k is put to the side for a while, and the couple attempts to get by with one car, in the meantime, paying the minimums on all other debt, and continuing to add money to the “car fund”, they should be able to put away a decent amount… especially considering the savings that not paying for gas and insurance on the second vehicle will get them. Then, if they determine that the second vehicle is needed, they will have saved up some extra for that, and, if not, they can slam over half their credit card debt in one fell swoop.
I think that, given that you are doubting a car purchase, you already really know the right answer but are too scared to face the change.
As long as you have debts, everything that you buy costs you the equivalent of the interest that you do not pay of on your existing debts.
Use the money to half your credit card debt then focus on paying that off before you take on any other debt.
It sound like you are really focused and determined to clear your debt and increasing your debt right now with something that is a liability (not even an asset) will be suicide.
I’m sure you’ll survive with 1 car.
My wife and I were in a similar situation. We had an old, 1995 Hyundai Accent that had no heater to speak of (unless one bent unnaturally under the dash and physically turned on the heat lever), couldn’t roll down the driver side window but yet drove like a dream. Unfortunately, I was rear-ended on I-95 in April last year in Connecticut. The car had long since been paid off, but we couldn’t afford a second car payment, and both of us needed to drive to work.
The insurance company ended up giving us $1,400 for the car, even though the bluebook value was about $150. No idea where they got their math from but I wasn’t going to complain.
Because I required my car for my job which takes me all over the state, I’d drop her off in the morning at her school, drive to work, do my business, pick her up, drop her off at home and go back to work. It was awkward, but at least we got by without the second car.
When our son came along in July, we were able to make it a few more months as she was staying at home, but by November, we really needed a second car and got a 2008 Scion xd. A great investment, great mileage and terrific price.
Since then, we paid off the other car with our tax refund from last year so we still have one car payment.
Hi,
This is a bit of side note to this dilema, but hopefully it helps. First, maybe you don’t have to settle for the $4,000. It is possible to negotiate that with the insurance company, because (I believe) you are not obligated to accept them totaling the car. In the book Getting to Yes I once read a great description of someone negotiating a better deal for a totaled car.
If it is totaled, you may have two options – take the payment and give back the car or take a slightly smaller payment and keep the car. I once had that choice, and accepted about $200 less than the max offer to keep the car, then sold the car for $440. It was a much less valuable car than yours, obviously. So, that may help you get a little more money back for the car.
Finally, I would think that you could find a pretty reliable car for under $4000 for use as your second car, if the one you currently drive is in decent shape.
Well, good luck!
Chris
Can the hubby make his sales calls on the motorcycle (not sure what he sells – possible if he sells insurance or something of the like – likely not possible if he sells something big that he needs to take everywhere)? Or can April operate the motorcycle? May not be a bad idea to pay down the debt, keeping only one car and the motorcycle. Have hubby drive the car most days and April carpool most days. When she cannot do the carpool, either hubby or April take the motorcycle. Still keep the bike for sale and when it sells, use that to buy hubby a new car.
I agree with JD – stick the $4000 settlement in savings and see how it goes on one car for awhile.
If it doesn’t work out, *pay cash* for a used car. You can get a LOT more car than you think for $4000. I’ve bought a $3000 Toyota Camry (1994) and $2000 Mercury Sable (1994) in the last 8 months, and they were both great cars. Nothing glamorous, but I’m not trying to impress people I don’t know or like :-).
Unfortunately, the Camry was totaled in an accident during a heavy snow, and we didn’t carry more than liability insurance. Fortunately we don’t have any car payments and an emergency fund so we bought the Mercury about 3 days later when the opportunity presented itself.
I support paying off debt and foregoing a new car. I love being debt-free; it’s like having lost 100 pounds. The real need isn’t a car per se; it’s transportation, which need can get met — happily and inexpensively — by many choices besides car ownership. More at http://alison97215.wordpress.com/
Fortunately, (knocking on wood), I haven’t been in a predicament as you and April. But if asked my opinion or what would I do, I would advise her to allow her husband to use her car and she take the 4k and find a used car. Now she should be able to find something decent for at least 2k over that, which means she’d only finance the 2k which would equal low payments.
OOOoooOOOooh!!!
Steve (#8) hit the nail on the head! Either defer as JD suggests, or buy an old Volvo wagon!!!
I had one (a 1985 turbo) and LOVED it. I swore I would never part with it. I finally did part with it when I traded up to a 1985 Mercedes 230TE wagon (Euro model) for $2900. You CAN buy a QUALITY old car (NOT a junker) that will hold its value and serve you well. When I sold my Volvo (for $1200) it had nearly 250,000 miles on it. My mechanic assured the new owners that it was well cared for, and would easily last to 350,000 – 400,000 miles!
You can do it!
In a town with no viable public transport, making do with one car could be a real headache for a couple where both people have to go to jobs. On the other hand, since one partner has relatively minimal driving needs, it may be worth trying, just to see if it’ll work.
The Great Desert University recently started a flexcar plan: a $35 annual fee gets you access to a shared vehicle; you pay $9/hour for its use. It might be worth looking around in your area to see if anything like that exists. And if your town has more than one cab company, it would be worth calling around to compare costs: ask them how much a trip to the office would be, and how much it would cost, say, to get from the office to a doctor’s appointment and back. If you’re carpooling a lot, an occasional taxicab ride probably won’t break the bank.
Meanwhile, if it were me, I’d bank the four grand someplace that will make a little interest, and then try to add a little to it each month. The longer you can hold out, the more you’ll have to buy a new chariot when you can…and the closer you’ll be to your goal of paying off your debt.
But do check in to the insurance thing. My son works for a huge insurance company, and he has learned that insurors try to short people, and that it’s possible to insist on a better settlement. Unfortunately, he learned this AFTER his wonderful Camry was totaled when some kid ran into it while it was parked on the street. He really got cheated by the kid’s parents’ insurance carrier, and ended up having to buy a junker that was in no way comparable to the excellent vehicle he’d been driving. Knowing what he does today, he periodically kicks himself for not understanding that he could have gotten a better settlement.
Definitely do not get a car that you have to finance. The experience on this car shows why. If you have car payments and your car is in an accident, the insurance company *requires* that you use the money to repair the car. If you own the car free and clear, they give you the money and you can do whatever you want with it. A few years ago another car sideswiped my car and put a dent and many scratches in it. The insurance company told me which repair place to take it to, and the repair place gave me an outrageous estimate for it — something like $3600. I even told the insurance company that the repair shop had to be inflating the amount, but the insurance company didn’t care. They cut me a check for the full amount. But because I owned the car free and clear, I didn’t use the money to un-dent the car — I used it for a new roof on the house. I meant to get the car un-dented someplace cheaper, but I didn’t get around to it. I did feel a little bit trashy driving my dented car around town — but then a driver ran a red light and hit me smack in the side, totalling the car entirely. (I was not hurt, just bruised — yay Honda Civics.) Boy was I glad that I had not put all that cash into getting the dents out of my car, but had put it into the roof instead! So in short, financing a car means that when you get rear-ended or whatnot, you won’t have the option of taking the cash and using it how you will. The other people commenting have raised great points about not incurring more debt, but I rarely see this one raised.
it is amazing how much money you can save doing car repairs yourself and you can keep a car going usualy alot cheaper than car payments. Yeah you might drop $400 on month for parts but if that $400 keeps it on the road for another year or even three months it is still cheaper than a car payment.
Points that are important with car repair
1) buy a manual such as hayes repair manuals they are cheap(about $20)
2)call around for prices (for parts and repairs)
3)things that NAPA,auto zone or advanced auto parts dosent have getthem at the junkyard they are much cheaper.
4)dont worry about fixing things that are cosmetic only unsless you are going to sell it
4)don’t force any thing so much that it breacks
if you breack somthing it can cost you a lot take it to the repair shop(not the dealer they are expensive).
I’d recommend checking out this book while deferring the decision. Basically, there are way more hidden costs in car ownership then we even realize.
http://www.amazon.com/How-Live-Well-Without-Owning/dp/1580087574
We had a similar situation a couple years ago…we managed with one car for a few weeks, i would walk the kids to school and then took the bus to work…but we found that our lives are too busy running the kids to this hockey game or that dance class that we definitely needed 2 vehicles…we ended up buying a 1989 toyota tercel with 60,000 kms for $2000, which is the payout we got from our insurance…it’s not the coolest car, but it gets us for A to B and we don’t have car payments.
It is a personal decision, you have to do what’s right for your family.
I’ll pipe in here. I’m the April who sent in the question. Thanks to all for such great advice. I think we’re going to get a much higher payout than I thought ($7000-$8000). We’re either going to wipe out the credit card debt (we’ll keep $1000 for a start on our emergency fund) and try to go with one car, or we might buy my parents’ Jeep Cherokee for $4000 or so and put the rest toward the debt. We’re leaning toward the first option.
One commentor said I knew what I wanted already, but seemed scared. The truth is that I’m not. I’m totally game. My parents both acted like our idea was crazy, though, so I thought I’d get a bunch of opinions from people with all kind of experience. It seems most of you agree with my original thought.
To clear up a couple of points:
1. The motorcycle will be sold. I won’t ride it, and my husband makes sales calls, so he can’t take it to work. He has to have car stock that isn’t going to fit on a bike, and reeking of gasoline isn’t professional. We had a deal that he’d sell the bike because he knows how much it worries me. I’ve seen what an accident can do to someone on a bike. I know the bike-fans out there will disagree with me, but that’s what we’re going to do.
2. We can’t salvage the truck. The frame is bent. Even if we could get it fixed, I wouldn’t feel safe driving his truck anymore, and I certainly would not want him driving it considering how much he drives.
3. To Starving Artist–wow, you really assume a lot about people. Where did you read that we were living with my parents? I said my dad and I carpool. You can carpool with people you live next door to, which is our situation. How do you know what we’re going to spend to build our house? My dad is a contractor, by the way. Our lot will be paid off in a couple of years, then we’re building a modest home we plan to live in for the rest of our lives. We’re paying over $1200 a month to get the “heavy debt” of $8000 paid, so it will be gone in no time. Even sooner if we use the payout from the truck.
I’m not ignoring the mastodon in the room…I just don’t see it. Maybe others can point it out to me.
My paid for car went into the repair shop yesterday for at least a week to fix the damage done to it by a big rig that hit us after a tire blow out. Luckily for me, the car was not totalled even though damage is significant.
Personally, I would have to buy another car. There is no way our household can be one car down. I use my car daily for work and client visits. To be without a car means that my income suffers. In your reader’s shoes, I would put the insurance money towards a new car and acquire a payment. I wouldn’t want to do that, of course, but my clients wouldn’t want to see me roll up in a $4000 used car either. $4000 doesn’t buy much around here.
I would say since you are stretched pretty thin already with payments, take the 4K and put it toward the debt and find a way to live on one car for a year or two, how ever long it takes to pay off the debt and car payment you have. (you would save the insurance and gas costs on the second car too) Then after the slate is clean you can either keep waiting for a new car while saving cash (the smartest option), or take out a car loan on an affordable fuel efficient car and pay it off agressivley. If you have the option to not drive these days either by not having a car or using alternative transportation it is a huge cost savings.
April,
Sounds like your willing to take the leap BUT if you decide you can not make it on one car – PLEASE look for a car in the $1000 range rather than the $4000 range. You will have more money for debt and really, truly you can get a running car for that kind of money. We have recently bought 2 cars for our kids and safety was our first concern and dual airbags (guess that is also safety) was our second after that we wanted cheap. We bought one son a Hyundai Accent in really nice shape (but very dirty on the inside but nothing elbow grease didn’t fix) and it runs like a dream, great gas mileage too. We bought it for $600. Is it stylish? No. Is it sexy, no but is it safe and great transportation? Yes. We have owned it just over a year and have done nothing to it but change the oil (oh, and the kid added new hubcaps and some other cosmetic crap) We paid $1500 for the other kids car and it is equally good but not as good of a deal. Probably will have higher resale value as the Accent doesn’t hold value but at $600 who cares. Best of luck to you April – you can do it! And glad it is closer to $7000. By the way, neither of these cars had over 100,000 miles.
Def try and do what you can with one car.
I, like many of us out there, have been in debtr quite a while and the lure of a new car often times gets the better of me, but I have a car right now fully paid off.
If you can use that money towards geting out of debt, do it. Not having the second car will def save you in the end, even with gas prices the way they are. City transit, cabs, and flexcars are def a great way to go.
Figuring out a schedule with second car can also be an option.
The first couple of months of adjustments would be the hardest, but everyone adapts and soon enough you won’t even miss the 2nd ride when you see how much your actually saving in insurance, maintenance, and gas.
Also, with everything going on right now, I didn’t even consider the insurance savings many of you pointed out. Just one more nudge in the one-car direction.
Defer as long as possible. Even be willing to “rent” a car from a friend/relative when it is your time to carpool.
When it is time to buy, get an old Civic, Corolla or something of that nature – cheap. Those cars run for years and their owners are always satisfied. I’m not sure I’ve ever met anyone who badmouthed a Civic or Corolla.
For that matter you could get a $1500 Kia and let your husband drive your car, keeping the Kia at home until you need it. My sister (who is 40 and has money) always buys a $1500 cheapo car (Kia, Geo, Saturn) and drives it for 5 years and then sells it for the same price she paid for it. She drives one of my parents’ cars when she goes more then 50 miles from home, but those little beater cars are gold for driving around town (hint: this is why she has money – no car costs other than gas and regular maintenance).
Good luck with the car decision and the decision to get out of debt!
One more thing…you don’t mention emergency fund. I think any money received from the totaled car needs to be your emergency fund, especially if you only have one car!
it’s tough to say what i would do.. since a nice car to drive is important to me.. i’m willing to make the sacrifice to pay a little extra for a nice automobile (even if it means paying extra for gas too =/)
in their case.. maybe this is a blessing in disguise.. i would cash that 4k (or whatever it is they will be getting) and use it to pay half of their credit card debt.. sacrifice for a few months and use only 1 car.. heck.. maybe he can take his motorcycle to work!
then once they knock out that CC debt.. the husband can go ahead and finance whatever car he needs.. if they are really serious about getting their finances in order.. this is what they should do
One word Scooter. This might not work if you have to take the hwy.
I’m currently going through this struggle myself. I’m a bit of a car freak, so these choices may not make a whole lot of sense to someone trying to save as best they can, but cars as a hobby isn’t something I’m willing to relinquish.
I have a Z06 Corvette, which I’m racking up way too many miles on. I currently owe ~$10,000 on it. I also own a motorcycle, and I did own a pickup which I just sold. With the money from the truck, plus some savings, and with the possible sale of the motorcycle, I’m thinking about paying off my vette. Problem is, I don’t like how many miles I’m putting on it, and even though it gets 30mpg on the highway I could get something more efficient (i.e. not 93 octane). I’ve created a spreadsheet that tells me in just 1.8 years I’ll break even by buying an $8000, 32mpg 87 octane car, and that in 3 years I’d break even with a $15,000, 35mpg 87 octane car. So currently I’m leaning towards purchasing a new car, selling my motorcycle, and using the money I get from the sale plus the savings to go towards the new car. I’ll have two payments but I think in the long run I’ll be better off.
Lots of great ideas here. I’ll second the notion of deferring and getting the 2000-4000 econo car if necessary. If you’re anywhere near a larger city, there are plenty on craigslist. I like to review the used car research on Edmunds, MSN Carpoint and Consumer Reports before buying. Edmunds has a great feature called true cost to own that estimates all expenses related to owning a given model over a 5 year period. It’s a great way to assess those questions about whether it’s better to buy a more expensive car that is more reliable and/or will get better fuel mileage versus sticking with what you have.
I’ll also agree with KC (#50)’s comment that you can’t go wrong with a Civic or Corolla. I would add that the Geo/Chevy Prizm is actually mechanically identical to a Corolla, and often costs less. Both the Prizm and the Corolla were manufactured in a GM-Toyota joint venture factory in California. I believe that plant also produces the Toyota Matrix and Pontiac Vibe. The mid-late 90s Nissan Sentra is also a decent bet.
In my case, based on my family situation and Edmund’s data, I opted to hold on to my wife’s 2002 Explorer with a V8 even though the fuel costs have gone up so much. We wouldn’t save enough on gas to cover the cost of transitioning to another more efficient vehicle that meets our family’s needs. I sold my F150 and borrowed my father’s 20 year old Toyota pickup to commute. It will get me by until debt is paid off. Also we’re moving to within 3 miles of work, so I’ll commute by bicycle and avoid buying a second car for the foreseeable future.
I suppose that it would also be worth mentioning that if you live next door to your father, you might be able to work out an arrangement with him to share a car for those occasional needs. As I mentioned when I discussed my situation, that’s working out for my father and I.
I have a very detailed spreadsheet that I worked up with Edmund’s data to support my decision if anybody is interested.
TOTALED? – What this means in insurance land is that the repair cost is more than the blue book value of the car. Often you will come out ahead if you can convince the adjuster to NOT total the car, but they often want to total it because they come out ahead by giving you a check and selling the car for scrap.
For example:
TOTALED – they give you a check for $4000
They sell the car for $1000
Their net cost is $3000
Vs. If the repair costs are $3800 then they have to give you a check for $3800 AND YOU GET TO KEEP THE CAR.
The secret with a used car that is paid for is to get a SET OF ESTIMATES from a small independent body shop. Tell the shop that you are going to pay cash, buy used parts, repaint the old parts, etc.
This DOES NOT WORK if you owe money on the car. The bank uses your car for collateral and they have a right to make sure the car is COMPLETELY fixed.
If you own the car free and clear you can take the money, fix only the things that need fixing in your opinion, and still have a driveable vehicle.
TIP – ask the adjustor if you can keep the car after it is “totalled.” Ask if you can buy it from them? This will let you know what they are doing with the old car. You are in a much better position if you already have some repair estimates BEFORE you show the car to the insurance adjuster.
@ Mike: I’d be interested in seeing such… do you have it publicly posted somewhere?
I like the try for one car for a few weeks before making a decision idea.
If they need a second car, there are lots of reliable cars for under $4,000 if you’re willing to drive something a little bit older. Honda Civics specifically are known for their longetivity. All they need is regular maintenance which is not any more expensive than the maintenance you would pay for any other car (probably cheaper since the cars and parts are soooo common).
Also, the season for motorcycle riding is soon approaching (or may already be here depending on the area of the country), so they could combine the 4k with the proceeds from the motorcycle sale to purchase something a little fancier.
OR, April could take the motorcycle to work on days she really needs to drive her and husband could take her car. 🙂
I know it’s the same advice as a lot of other people, but I would recommend attempting to be a one-car household for a while, and if that doesn’t work, buy an older Honda. Specifically an older Honda because they last for many, many miles. I know of a lot of ’88 Accords that lasted to *past* 300K miles (I just sold my ’88 Accord w/166k for $1500), and my ’90 Accord had 200k+ miles (sold for $2000 2yrs ago). Great cars 🙂
She said her husband says he “thinks they’ll total his car.” They need to find out first if the car is truly going to be considered totalled, and often when a car is considered totalled, that might not be the case at all.
If the car is in fact totalled, do a thorough search before you buy a new used one.
To JD,
You bought your new Focus and drove yourself deeper in debt. Yet you still have the Focus, you know everything about it maintenance-wise, and you’ll probably have it for a long time to come with luck and TLC. Sometimes you gotta take a step back before you go forward.
With gas prices being what they are and the trends pointing to $5.50 gallon in 4 years or less, I’d recommend moving somewhere where they could walk, bike, and use mass transit.
Owning a home builds equity. Cars lose value. Our society is undergoing a fundamental shift.
Visit http://www.walkscore.com and put your address into the box. If your score is under 50, I would seriously consider moving. We moved to a condo with a Walkscore of 83 in 2006. Our gas bill so far this year, for two people with two cars = $496. This is possible because we mostly walk and take the bus.
I’ve never paid more than $2000 for a car. They’ve always been quality vehicles that lasted for years. There’s your standard couple of hundred bucks for repairs a year but it’s minimal. For the $4000 I’d buy two cars…just kidding. Seriously though, but a good $3000 car and you’re set. You wont get all the bells and whistles but who cares? It’ll get you around and it’ll still look sharp for that price.
interesting- i had never seen walkscore before. however, they don’t take into account crossing dangerous roads! they say the cinema is half a mile away from us… yes, if you cross the major interstate on foot! the grocery store is about a mile away, but from our place you have to cross 6 lanes of traffic. i’d be afraid to do that on foot or on 2 wheels.
i concur with the wait argument, and if you do need another car, buy a late 80s/early 90s honda or toyota. go for the 4-cylinder instead of the v6.
Depending on which state you are in, you can request that the other guy’s insurance company not pay you for the totaled car, but to request that they replace the car. Same make, model, miles, and same condition that your was in.
walkscore.. pretty interesting.. i got an 18 =/
makes me seriously want to get a scooter
People: Starving Artist got it right. SELL THE LAND!!! Raw land is generally a poor investment. Sell the land (assuming it’s not “under water”) and pay off the credit card. Also, they should be able to buy an adequate used car for $4K. Or, try to go without. For two years, my wife had no car. She got by through a combination of car pooling, taxis, buses, friends, walking, the occasional car rental, etc.
I like the suggestion on waiting a few weeks and seeing if you can make it on one car. Give it maybe 2 weeks, then decide. If you need a car, you should definitely be able to get a decent used car for $4,000. If you do buy a car, don’t forget to have a professional mechanic give it a look, and try to save some of that $4k for repairs that undoubtedly will pop up in the next several months.
@ JMG: Why again would we sell the land we plan to live on for the rest of our lives just to pay credit card debt that will be gone in less than seven months, if not almost immediately if we use the money from the insurance company? And what is “under water”? Do you mean upside-down? Hardly. It’s skyrocketed in value since we bought it, and we bought it for well under market value at the time.
By the time the land would sell and the closing would go through, based on average days on market in this area, the credit card debt will be gone. When we build, we’ll have well over 20 percent in equity to put toward the construction loan.
I’m not getting what the issue is here.
Get rid of the cars, get jobs that don’t require you to have cars.
Joe Falconer is right. Deal with the problems as they occur. If you can repair your vehicle, you would be better off. If you do have to get a car, try to find something small that isn’t new and gets good gas mileage. If you use it for sales you should be able to claim a mileage discount on your taxes. check into it.
I, like you, would defer.
However, I would also caution her about going into more debt when she buys a car. You don’t have to get a new car to get a really nice car. My boyfriend just bought a 2002 Saturn in gorgeous condition for 5000. You can get good used cars in the $4000 range without spending it all on a new one.
Buy a $2000 car.
Pay off $2000 worth of debt.
-Ken
While I absolutely agree that you should consider the one-car path, I’ve actually gone the other route with success before.
About a year and a half ago, someone hit our ’04 Grand Prix and their insurance company give us a fair bid for the repairs, around $5,000.
We took it back to the dealership where we’d bought it used and asked them what they’d give it for us on trade as-is (they have a body shop on site). And they offered us about $6,500 for the trade.
We shopped around their lot and found a used ’06 Grand Prix that they’d had for almost 120 days (so they were motivated to discount it) and got them to settle on a price of $12,500 for the car (once taxes and everything came into it).
Well, we gave them the trade, and used the money from the insurance company to pay for most of the rest of it.
We rolled the rest of what we owed on the ’04 into a new note on the ’06 and ended up $1,000 deeper in debt for a car that was 2 years newer and had 26,000 fewer miles on it.
So, you might argue that we did the wrong thing, going further into debt, but it’s not every day that you can upgrade to a car that’s a year old with 2 years fewer miles on it for $1,000.
Essentially, we added 2 years to the life of our old car for $500 a year.
Another benefit is that my credit had improved over the time since we’d gotten the previous loan at 12.5% interest and the new loan was at 8.2%.
We considered it a good deal and paid off the entire loan 10 months later.
I would move. In fact I have, four times in the last two years. The first move was to a larger city with a lower cost of living, the second move was from an apartment within biking distance of my job to an apartment withing walking distance. The third move was to a much larger city with much better transit where many old friends lived. The fourth move was to a more central district in that city. Location was vital in all of these moves because I refuse the wage slavery that car ownership requires.
Gosh, some people say they want to get out of debt, but then they constantly find reasons to jump right back in. This really isn’t a difficult situation — either try to get by with one car or buy a second car that costs no more than $4000. At some point, you must decide to live on what you have and that nothing is worth justifying debt. In terms of how much her husband drives, very reliable Honda Civics and similar cars can be purchased for $3000 or $4000.
Kudos to April for carpooling. On the rare occasions when she needs wheels, some options may be: Flexcar, public transportation, a nice bike ride.
Assuming she’s in the US, the public transportation option might not be a good one. This country really needs to work on that. Our train and bus system really sucks compared to Europe. Though I will say that San Francisco has a pretty good system.
This is getting somewhat off topic, but within my lifetime (I’m 27) I believe I’ll see less people living in rural areas. Vehicle ownership will become far too costly, so folks will have to live closer to work out of necessity. That means people being less spread out across the land (less elbow room for individuals), and more concentration into urban cities. Small apartments will go for ridiculous rates (think Manhattan prices in Austin…or worse). It will probably start out with people using their cars more as a recreational appliance, like a ski jet, instead of a regular means of transportation. But I digress. I could spew my doomsday rubbish all day and never get tired of it 🙂
Also agree with the “wait a couple weeks” approach – in addition to the reasons that JD lists, every week that you don’t spend that money you earn some interest and have the opportunity to look for a good deal. Even if they eventually buy a car, the longer you can hold off on the purchase the longer they can look for a good deal, get interest on the $4000, and learn to make adjustments to their schedule so that when they do return to a 2 car household, they can learn to use that 2nd car less often, therefore saving on gas in the future.
Hey April, it wasn’t a personal knock, it was the “rent free” bit (you don’t mention that you carpool with your Dad in this post). Sorry, I assumed “rent free” was code for “living with parents.” It usually is. Also, you don’t mention that you’re (consistently) paying $1,200 a month to pay off the CC’s–knowing you have an extra $1,200/month makes it apparent that you’re a whole lot better off than the original post made it seem. In the original post, you were mysteriously living rent free (which sounded dire) and barely had a nickel to spare. Sounds like you’re fine one way or another.
I think trying the one car strategy initially is smart. You can always purchase a second vehicle if coordinating rides does not work out or is too stressful. I have been delaying buying a car for three years now and continue to put it off each month while I function fine with public transportation and the occassional taxi. Each month I put away a little in an account I know will one day be used for the car purchase I keep delaying.
Pay off debt for sure, a car will just depreciate.
Buy a car and you will be losing double your money (interest on debt, & depreciation on car).
I would buy a used car that was reliable (Buy Toyota, cough). If I didn’t have enough money to buy something reliable I would borrow just enough so I could. If I had money left over from buying a cheaper but reliable car, I would pay off as much debt as I could.
this is one case when a poll would’ve been so much more efficient…
i agree w/ defer decision
We’re having fun making suggestions — but don’t take them all personally. We’re just giving our opinions; you have to make the decision…
I would have suggested keeping the motorcycle and your husband using it for his work biz. (saddlebags could hold the car stock, I thought, but what do I know…) Another possibility that hasn’t been mentioned: how about purchasing a scooter, instead?
At the very least, you should be able to get reliable (used) transportation for a good bit less than that $7000-8000 settlement. The folks’ Cherokee sounds like a good idea to consider — we’ve driven used Cherokees now for two decades, and have generally been extremely pleased with their reliability. (Although they don’t get terrific mileage — in the 17-25 mpg range.)
We had two Cherokees (see, I told you — love ’em!) and sold one to our daughter. That was a year ago. DH takes the car to work most days, and I do errands/groceries when he gets home. (Or I take him to work, do my stuff and pick him up at night — this happens perhaps once every two weeks.)
One unexpected benefit of living with just one car: you spend less! It must have something to do with fewer trips to the grocery store/Walmart/wherever. And the trips you do make are a better use of gas and time. Even trying it for a month or two will give you time to find the best bargain possible.
Obviously from the many replies, there have been a lot of us out there in your position at one time or another. Good luck to you!
Don’t worry sharing will work out fine. Pay your debt off since that looks like it is right there, it will feel AMAZING. Conveniences are sometimes something that you don’t see as conveniences but as necessities until you change your outlook and just jump in without the “necessity” there. Try the one car thing, remember you can always change it later, but I don’t think you will want to for awhile. We have gone down a car when I was working from home. We intended to get another car when I started commuting but I didn’t push the issue and shared a car with my live-in mother in law. We are glad that we didn’t purchase another one when originally intended as now we have to make a different purchase for a minivan as we are expecting baby #3. See it works out in the end. Plus you’ll never know how well you will do without it until you try.
Ok, I have not read through all the comments so I don’t know if this has been mentioned.
Most Insurance companies use the NADA to determine car prices. Be sure to look this number up b/c it is usually less than Kelly Blue book and Edmunds.
But don’t stop there! Check your local newspapers to see what your make and model is going for and discuss the price with the insurance company using the research you’ve done. They can usually give you more money than what they first offer.
PJ, love the http://www.walkscore.com mention. I just learned that I’m also an 83.
I need to know what year the car is, what kind of car it is, what the estimate is, and which insurance company hit you. What is your insurance company and do you have full coverage on the car? All these are factors.
Insurance companies are not going to total your car if they don’t have to BUT there are differences between insurance companies. Here in Illinois I know State Farm does not use Aftermarket parts but most other companies do. So in this case if State Farm hit you and no used parts were available they would have to write the car for new parts totalling the car that much faster. ALL insurance companies will try to save the car by using used parts. If the car is totaled but DRIVEABLE ask the insurance company if you can owner retain the vehicle. If the car is old enough you will get a check AND the car. The check would be lower than if you gave them the car but you still get some $. In Illinois I believe it is 8 years old for a vehicle to be possible for owner retainment. Sometimes it’s best just to get rid of the car though, if it was hit hard. Try to get an idea of what your car is going for in your area. Insurance companies are supposed to give you the value of the car IN YOUR GENERAL AREA. Try to negotiate if you think your not getting enough. Remember they can’t take the car until you RELEASE it to them. If the shop/yard is charging storage then they are charging the insurance company, meaning that the insurance company will want to total the car and get it out of there. You can use this as leverage against the insurance company if you feel they are not being fair. I hope this helps.
Oooh. I love the Walk Score, too. Our current score is 55 (and I’m surprised it’s that high). Our score before we moved four years ago was a 71. That seems about right. I’d love to have an 83! 🙂
If there were a Bike Score, we’d do all right on that…
What’s wrong with buying a $4,000 (or less) car? In reply to your question, yes, we’ve been making the decision to pay off debt rather than buy replacement vehicles for years. Both of our cars are 12 years old. But we just keep fixing and maintaining them, and we don’t have car payments. And, we’re out of debt. We’ve been able to purchase several spendy household items (water softener, water heater, heating repairs, etc.) and go on vacations without going into debt and it feels great!
Just as I figured, our Walkscore is only 14. Ugh. This is exactly why we are planning on moving within a year. I would LOVE to be able to go without a second car! I do hope it works out for April to forgo the replacement vehicle – just think of the money they’ll save.
Paying down debt is always a great option.The repayment is always in tax paid dollars. So it takes a lot more time.
What is a walkscore?
I agree with JMG and Starving artist…sell the land. You cannot afford the land, cannot afford to take out the 20% equity in the land to use towards house construction, and cannot afford to build a house on the land. You are paying $1013/mo, which sounds like you are spending well over 50% of your income on something you cannot use.
how much did you buy it for? how much is it worth now? how much equity will you have? how much will you still owe?
I’m going off of what you have written with the understanding i have no numbers here, but you will still have a $1013/mo payment on the land since you are expecting to have only 20% equity in the land. In order to tap the 20% equity, you are going to have to take out a loan, which means you now have two payments unless you are refinancing the land to consolidate and get the equity, in which case your one payment will increase. Presumably this 20% equity is not going to be sufficient to build your home, so you would be taking out a loan to pay for the difference, which means you will have another monthly payment. given these rough estimates, have you actually done the number crunching to determine if you can afford this? From what is given, I simply do not see how you can afford what will eventually be double the $1013/mo payment on the land in order to keep the land, tap the 20% equity, and take out a new loan to pay the difference for the house.
coupled by the fact, you have no savings or emergency fund. moreover, home ownership also includes increased property taxes, insurance, etc which means you should be adding an additional 30-40% of your now roughly $2000/mo for land+house payments. granted, i’m just throwing fictitious numbers out there, but i simply don’t get how you can afford the land. get rid of it, pay off your debt, get your second car, and then save towards your home ownership goal.
As someone who has worked in personal injury/property damage law, I would caution our hero toine be careful of counting her chickens before they hatch. Any number of things can pop up in the claim/lawsuit process that could reduce the settlement amount. We warned all of our clients not to rely on receiving any amount of money from their cases and yet so many ignored our warnings and were left in awful financial situations because they took our preliminary estimate as a final figure.
I know that this question is posed to us as more of a theoretical exercise than a real life advice situation, but I wouldn’t feel right without at least posting this warning.
I think April is close to making her own decision! See #44
Interesting to see different takes on the topic.
I guess the best idea is to buy a small car that doesn`t use a lot of petrol.
I`d take some used car from some trustworthy carmakers.
Everybody should start thinking of a smaller car now to cut expenses.
GL to all
@Tim: We’re using 50 percent of our income toward the land? I didn’t ever state what our income is, so that’s some interesting math you’ve done! I listed our biggest monthly bills, not total income. Our lot payment isn’t even 25 percent of our income, and it will be mostly paid off and rolled into the construction loan (accounting for 20 percent of the total loan). No need to worry…I have a real estate license, so I do know what I’m doing. It’s not at all the scenario you’ve come up with.
If my posts sound like I’m offended, I’m really not. It just surprised me when a few people took the limited information (I can’t post every detail–it’d be awfully long and boring) and went to so many extremes. Luckily most posts fell somewhere in the middle, and I got so much great advice. Thanks to everyone who weighed in.
To sum up what a financial expert told a group of us teachers…a car is one of the worst investments we make! Rather than spend $20K on a new car, spend $4000 on a properly researched used car every 5 years!
(amounts updated to today’s prices since this was 15 years ago!)
The one car strategy works great though it can cause a little bit of pain.
When my wife started her first job in 2004, we could have bought another car but we decided to just do with my 5 year old car (even though together we were making 8000 per month after tax and our other expenses were only 3500).
We had to align our work timings so I could pick her up and drop off etc. (On occasion she would request one of her colleagues to drop her off).
Thanks to little pains like this that we took, we saved and invested enough that once we had a baby this year, we had the luxury of my wife deciding to stay at home for a couple of years.
It was all a matter of planning ahead about what were the goals we *really* cared for, and dealing with small pains to make that happen.
April, as i said, i was going off of the limited info you posted, so why not post your stats because it takes very little to post your monthly income and expenditures? when asking a question of paying off debt vice buying a replacement car, the answer cannot come in a vacuum, because you have a larger financial picture that is at play here. by omitting key details of your overall financial picture, you simply cannot get a real answer to your question. it may not be all the scenario that i have posted, but there are key things in your budget that you lack like savings, retirement, and the biggie an emergency fund which you haven’t denied. given the further info you posted…
if your land payment of $1013/mo is roughly 25% of income, this means after taxes your take home is roughly $3500/mo. The three major debt amounts you’ve posted are land @ $1013/mo, car @ $240/mo, motorcycle @ $200/mo, cc debt @ $1200/mo (based off of you have $8k cc debt and you stating paying off in approx 7 months), which leaves roughly $700/mo for other living expenses. you didn’t list any savings, emergency fund, or retirement funds and are faced with needing a second car for work. if you are unable to reduce the $700/mo in other expenses, how are you going to afford a new car, paying down your cc debt, maintaining payments on your other debts, and continue to live?
let’s say that you can roll your equity into construction loan and you can afford approx $2000/mo for construction loan (also taking into mind that you haven’t paid off the land loan yet, but we’ll just wish that away) given that you pay off your cc loan in 7 months that would free that amount up, let’s further assume you can continue to reside where you are rent free (utilities free?) during your home construction, where are you going to get the additional resources to pay for extra home ownership costs, especially taking out a second car loan?
I still say get rid of the land, pay off your debts and then readjust your goals. sometimes you have life goals that you simply cannot afford to pursue, and from what you’ve written, you cannot afford to continue owning the land, when you have other debt and no savings. if your land has appreciated (which means increased property taxes coupled with property taxes on the house once you build it, etc), take the profits, get your finances in order before starting starting to think about a home loan, especially constructing your own home because construction always has additional costs. you are setting yourself up for failure pursuing home construction which invariably has those oops and i didn’t think of costs (presumably you are building your dream home on this dream plot of land), because you have no wiggle room in your finances either now or in the future. Asking the question of paying off debt or getting a car has nothing to do with your real estate expertise (otherwise, i’d say you wouldn’t be asking the question to JD). your real estate expertise should give you the advantage of insight into what it will actually cost you to construct a new home and owning the home, so you can use that information to determine if you really can afford to pursue this given your current income levels, debt, and savings or lack there of. to me and some others, you simply cannot afford to own the land at this time.
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.
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.
“
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.
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 😉
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.
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
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.
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!
LOL… Ditto what Rachel (#108) said!
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.
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.
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/
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!
@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.
@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).
@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.
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.
@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.
@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.
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.
@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!
@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.”
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.
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!