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?

More about...Transportation

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LM
LM
12 years ago

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.

r
r
12 years ago

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…!

TosaJen
TosaJen
12 years ago

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… Read more »

Brandon
Brandon
12 years ago

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?

Nicole
Nicole
12 years ago

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.

Frugal Dad
Frugal Dad
12 years ago

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!

Joel Falconer
Joel Falconer
12 years ago

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!

Steve H.
Steve H.
12 years ago

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… Read more »

Ryan McLean
Ryan McLean
12 years ago

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.

Leslie
Leslie
12 years ago

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…

Emily
Emily
12 years ago

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… Read more »

Andrew
Andrew
12 years ago

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… Read more »

Wesley
Wesley
12 years ago

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… Read more »

Danquixote
Danquixote
12 years ago

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… Read more »

profwitty
profwitty
12 years ago

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… Read more »

David
David
12 years ago

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.

Jamie
Jamie
12 years ago

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.… Read more »

Amanda
Amanda
12 years ago

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!

Emma Anne
Emma Anne
12 years ago

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.

Starving Artist
Starving Artist
12 years ago

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?

Peter S.
Peter S.
12 years ago

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.

B Smith @ Wealth and Wisdom
B Smith @ Wealth and Wisdom
12 years ago

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.… Read more »

icup
icup
12 years ago

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… Read more »

Allen
Allen
12 years ago

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.

Tiffany
Tiffany
12 years ago

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… Read more »

story
story
12 years ago

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… Read more »

Souliere
Souliere
12 years ago

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.

Kaffinator
Kaffinator
12 years ago

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.

Dave Farquhar
Dave Farquhar
12 years ago

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… Read more »

Brack
Brack
12 years ago

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… Read more »

marlon
marlon
12 years ago

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… Read more »

Tony
Tony
12 years ago

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… Read more »

Chris
Chris
12 years ago

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… Read more »

Mike
Mike
12 years ago

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,… Read more »

jtimberman
jtimberman
12 years ago

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… Read more »

Alison Wiley
Alison Wiley
12 years ago

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/

Lashawn
Lashawn
12 years ago

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.

Wanna Be Independent
Wanna Be Independent
12 years ago

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… Read more »

Funny about Money
Funny about Money
12 years ago

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… Read more »

Faculties
Faculties
12 years ago

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… Read more »

Chad
Chad
12 years ago

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… Read more »

ADM
ADM
12 years ago

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

Rhonda
Rhonda
12 years ago

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,… Read more »

April
April
12 years ago

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… Read more »

MoneyBlogga
MoneyBlogga
12 years ago

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… Read more »

Web Tech Gal
Web Tech Gal
12 years ago

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… Read more »

Char
Char
12 years ago

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… Read more »

Christian
Christian
12 years ago

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… Read more »

April
April
12 years ago

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.

KC
KC
12 years ago

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… Read more »

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