Credit and Automobiles

Several of my friends have made automobile purchases over the past two years. The names have changed to protect their identities.

Take Jordan. Jordan is in his late 20s, lives with his boyfriend. Has a Nissan vehicle that he bought used and is making payments. His payments are around 375/mo and his interest rate is about 15%. Some elements of Jordan’s life have changed and now he has a need to move out of this sedan and into an SUV. Jordan has poor credit due to mistakes made several years ago. Things have improved, but they are still far from ideal. If he buys another used vehicle he will get screwed over again with the financing because of a low FICO and high associated risk. The dealership he approached to buy another used model gave him horrible advice. The suggestion was he get out of his current car through a repo and just buy the one he wants beforehand.That way he doesn’t have to worry about making payments on two vehicles since no one wants to really buy a 5 year old car with 90k miles for what he owes.

My advice? See if a local credit union will allow him to refinance at a lower interest rate once his credit has improved. Or sell the car even though he is upside down, take a loan off to pay the difference and save enough cash to buy the SUV he really wants. In his situation, having another car loan and worrying about student loans and renting a house later this year is spreading him to soon. He will have to either get something really old like a ’99 Pathfinder or just make do with his sedan. I cannot in good faith encourage him to buy another car, the math just doesn’t work.

The next friend, we will call Adam. Adam’s situation is a little different. As a teenager his mother took out credit cards in his name, maxed them out and didn’t pay the bill. He also had one of his cars repoed several years ago when tough financial times hit. Adam is in his late 20s and recently bought a car just hours before we discussed his financial situation. Adam’s payments are ~$480/mo for 72 months on a used Kia that has a purchase price of $18k. The real kicker -his interest rate is 18%. Not 1.8%, not 6%, not 10%… 18%!!! I did some quick calculation. Over the course of his loan assuming he doesn’t refinance. His total payments will be over $34k. He said some people suggested he file for bankruptcy but that would be like a time bomb going off in his personal finances. I also believe Adam is making student loan payments, but not 100% sure.

I care about my friends, but don’t repeat their mistakes.

  1. Cars should be something you get to enjoy, not a financial noose that makes it impossible to do anything else fun in life.
  2. Anything over 6% interest rate on a car is insane.
  3. Car loans over 60 months are also insane. If it takes you that long to pay it off you really can’t afford it.
  4. Pay attention to your credit. It’s like an STD, bad past decisions can and *will* haunt you in the future.
  5. Nothing with a motor should be more than half your gross income. I got that one from Dave Ramsey and pretty much agree. Cars will depreciate and going much above that will leave you car poor. Expenses such as maintenance / repairs, fuel costs, and insurance will eat up more cash than people who just focus on the payment will realize.
  6. If you buy a new car and are younger, you may need to cut lifestyle elsewhere. In the case of both friends and myself, we eat out infrequently. Many millenials though are totally rejecting the idea of purchasing a car and getting into auto debt.
  7. Credit. Protect it at all costs, ignoring it makes you much more of a slave to money due to all the interest.
  8. Opportunity costs. Retirement planning, other activities to boost net worth. Jordan is going to college now and has a FT job. I doubt he has enough extra money to contribute into a retirement account. I have doubts about Adam contributing to his 401k because of his gripes about not having enough money to do certain things.

I’m lucky that my credit never got screwed up over the years, through my various trials and tribulations. My student loan is 4.25% and car is 1.9%. No credit card debt that carries from one month to the next. Not everyone is as fortunate. I hate paying more than I need to on anything. I used a 25% off first order coupon for Taco Cabana online. I buy items on Amazon if they’re cheaper than my local store.

It’s hard to watch people deal with financial pain, but at the end of the each day…we all make our own decisions.

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3 thoughts on “Credit and Automobiles

  1. Whoa. Those are super high interest rates!!

    As a friend, all you can do is listen and try to support them. And hope that they make better choices in the future. I know no one will take advice unless they ask for it, and even then, they don’t always really take it in.

    For me, I do have a car payment of $144 per month and I am saving money out of every paycheck to cover my car insurance which I pay every six months. I do have a newer car but the interest rate is low, and yes, my good credit score helped in that regard. Credit definitely affects your life.

    I wish I didn’t have a credit card balance again, but alas, I do. (There will be a blog post coming up about it, actually.) So kudos to you for not having one from month to month.

    You’re a good friend to your friends, keep it up.

  2. It’s so hard to listen to your friends and family make good or bad financial choices. I always want to give my opinion, but I have learned to hold back. I have been that person giving financial advice that went unheeded. Boy, was it hard to watch the fallout.

    • Yeah in the case of my friends the damage has already been done. In some cases I see them doing things that are digging the ditch deeper and deeper. I want to offer some advice but it’s their life not mine.

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