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Financing a car: is this dumb and is there another option?

Posted by skrepka (My Page) on
Tue, Mar 28, 06 at 15:03

Hello everyone.

I am delurking to ask for your thoughts.

Background: In September of 2003, our car (Chevy Celebrity, 1994) that we had for 3 years and had absolutely no problems with mechanically or aesthetically, even though it had over 110k miles on it, and was completely paid for was in an accident - not our fault - and totalled. Out situation was that I wasn't working, DH was loosing his job due to company filing bankruptcy and going out of business. He had no leads on a new job yet, although it was obvious that he will find another job shortly. We needed another car immediately so did not have time to look for a good used car. We ended up leasing a new Altima, since it was cheaper then buying and financing. Anyhow, that lease will be over in fall of 2007, thank goodness.

My personal feeling on this whole thing, is even though I like our Altima as far as cars go, I cannot stand that fact that we have to pay for it monthly ($230) and have nothing at the end of 3 years, and our insurance is insane because of it ($320 per month) -- this is New York.. Lesson learned: never ever lease a car again. I also doubt I will have a new car again or at least in foreseeable future. DH's feeling are not as strong on this subject, but overall we in agreement.

Now onto my problem. When this lease is up, we will need another car. It will defiantly be used. We think we might want to get a minivan at that point (two little DDs), but not sure yet. By talking to people we can trust, we expect to need about 8-10K, but hopefully less. We do not have that much cash unless we dip into out house downpayment funds which we cannot do. So the only way I see of getting that 'new' used car is by financing it. We have come up with two options: either get a car loan, or pay for it through student loans. The was I see it, student loans will have lover interest rate then car loans, and will be consolidated when DH graduates. We can always pay more on the consolidated student loan payment if we can. Payments will be way lower then out current car payment and insurance will go down as well. So we can still keep the same payment amount and pay off loan sooner. What does everyone think about this? Is there a better way to do it? FYI: DH will have to take that loan this summer as this is going to be his last year in school and he will graduate May 2007. His loans will be in deferment until about November 2007, when we will consolidate them and have to start paying them off. This will be about the time we will need to turn in our lease and get another car.

Thanks in advance for your thoughts.
Skrepka.


Follow-Up Postings:

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RE: Financing a car: is this dumb and is there another option?

I don't know if you were aware of this or not, but our illustrious Congress in their infinite wisdom, decided to raise the interest rates on student loans, and left the door open for them to be raised even more in the future, in order to finance the now-permament tax cuts for the rich. How's that for fair. Seems all that talk on making education accessible for everyone was just that- a bunch of hot air. Typical politicians.

I don't have another solution, but would caution you to more fully research the interest rates before making a decision.

Here is a link that might be useful: article on student loan rate increases


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RE: Financing a car: is this dumb and is there another option?

I know people whom have done exactly what you are thinking of (using their student loans to buy a car)
First of all,like you mentioned, it will be deferred. This means that you may be making two car payments later on when you only have one car. For example, you buy a car, you start paying off your car after 6months, your car dies and you need another one. You need to realize this up front. Of course this can happen if you buy using any loan.
also you can only consolidate your loans ONCE. So look around before you do this.
Really, this isn't a bad or a good idea. I think it really depends on the person.
Why can you not dip into your house downpayment funds?


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RE: Financing a car: is this dumb and is there another option?

I cannot use my downpayment fund because I will not be able to replenish it. Somehow it is easier to repay the loan when there is a monthly statement, then to take chunk of money every months and say we will not be using this. Also, we will be loking for a house within a year after the car thing happens, and will not be able to replenish that much in the savings in such a short time. Otherwise, we would just pay cash for the car in the first place.

I know interest rates on student loans will go up, but I bet they will still be lower then car loan rates.


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RE: Financing a car: is this dumb and is there another option?

For the life of me, I don't know why you would want to pay interest to some finance company or bank if you don't have to.

You'd have to afford the monthly payment in the first place--why not just pay yourself instead of the bank? $8,000 repaid at $250 a month would only take 32 months. You could also sink in the additional insurance money that you wouldn't have to pay by not having a bank loan. So say you add another $100 a month, which would cut your repayment schedule down to 23 months--less than 2 years.

You wouldn't have to tell me twice. No loan--good.


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RE: Financing a car: is this dumb and is there another option?

because I will need downpayment money within 9-12 months, not 23 months.


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RE: Financing a car: is this dumb and is there another option?

that insurance payment is crazy? have you shopped that around? I have a lease, albeit in florida, and I pay $600 a year for 250/500 coverage for a 2006 odyssey!


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RE: Financing a car: is this dumb and is there another option?

Everyone makes good points. Keep in mind that you can take an above the line adjustment on your Federal tax return for student loan interest. There is no deduction for interest on a car loan.


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RE: Financing a car: is this dumb and is there another option?

Am I the only one here who believes student loans should be for education, not cars or houses or other "stuff"? I feel for your situation, I really do. But I cannot recommend using a student loan to buy a car.

A couple of things to think about:

As another poster mentioned, can you shop around for a better insurance rate? You're paying almost $4,000 a year on car insurance (!). Unless you have lots of accidents or points on your records, you should be able to do better for less money than that.

What is the lease-termination fee on the Altima? Do the numbers work to turn it in early, pay the lease-termination fee, quit paying the (astronomical) insurance, and use that money to finance a cheaper used car? I know you're not crazy about financing, but if you could borrow, say, $10,000 at around 7% for three years, you'd have payments not much higher than you're paying for leasing the Altima and, at the end of three years, you'd have the vehicle. That still leaves you around $3,000 a year for insurance, too.

Do either of you (or a family member) have access to a credit union that might loan you the money at a better rate (or, conversely, offer you a higher rate for your savings)? Might be worth establishing that relationship to take advantage of their lower costs. I know my CU has deals a couple of times a year with some local car dealers with special pricing and financing for what's on the dealers' lots; that might help, too.

When you get to buying another vehicle, call whoever is insuring you and find out what it will cost to insure. Some cars are surprisingly expensive to insure because of the equipment they have or their popularity with thieves or the ease with which they can be broken into. It's a component of car ownership many people don't think about.

Finally, since I've been so busy raining on the parade, I will mention that you're going to have to have your financing ducks in a row before you buy a house. You won't get a very good rate on a mortgage without a steady work history, a good ratio of debt to income, etc. Scraping by to make a car payment now does not bode well for being able to make a much larger house payment (and property tax payments and home insurance payments and maintenance/home improvement costs).

Good luck!


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RE: Financing a car: is this dumb and is there another option?

Thanks everyone for your comments.

jlhung and steve, to answer your questions about my insurance payment. It is what it is. I am very happy that both of you have a mush smaller payments but we live in Brooklyn, NY and this is what rates are here. Neither DH nor I have had any car accidents ever, other then the one that totalled our last car and wasn't our fault. My dad, who has had a couple of accidents in the past, is paying about $50 more per months in insurance costs on the 9 year old car. On the other hand, as we are planning to move in the next two years from NY to Florida, I am very happy to hear about $600/year is possible.

Now Steve, to address your concern about our finances in general. They are in order. However, with astronomical costs of living in NY (our 2 bedroom apartment is $1100/month, gas and electric $100/moths each), horrible public schools ($2000/year for DD1) and daycares ($2500/month for babysitter for DD2 -- yes, that is two and half thousand, it is not a typo), expensive car insurance ($320/month), high city and state taxes, and other general living expenses, our $120K household income does not stretch far. As for stable work history, I did not work for 4 years as I was home with DDs and at the same time got my MBA. Before I stayied home, I work for a large national firm. DH has work without breaks (not his fault his last company went bankrupt) and is currently getting his MBA as well. He will graduate next May. On the other hand, we have high credit scores (me 780, DH 670) and have no consumer debt.

What we are banking on is that once we move to Florida, we might have to take about 15% pay cuts (buy then we both will have professional licences CPA and CFA, and may not have to take pay cuts at all), but have no child care costs (public schools and grandparents to help out), no state taxes, cheaper car insurance, generally cheaper cost of living, and even though we can easily get reproved for up to $500K mortgage, we are looking at properties in $250K range. So just because, we are struggling to make ends meet, doesn't mean that we don't have our 'financial ducks in the row'.

However, I think it is a good suggestion to look into costs of breaking the lease now. If it is not prohibitive and umbers work out to our advantage, it might be a good alternative to waiting another year for lease to be up. Also, thanks for pointing out that difference car models have different insurance rates attached to them. Definitely something to consider when looking for a used car.

I also realize that using student loans to finance the car is not an ideal situation, but to be honest, I am simply afraid to dig into our savings. It has only been in the last couple years that DH and I have become diligent about our finances (never had consumer debt or blemishes on credit reports, but were spending every last penny we had). Also, I cannot have fewer saving for purely physiological reasons. In January of 2005 my DD1 was in a car accident while on vacation in Cancun. My little 2 year old girl ended up in Mexican hospital with scull fracture and brain swelling and bruising. It costed us $22K to pay Mexican hospital bill and another $12K to air lift her to the University of Miami hospital, at which point our insurance kicked in. So, after watching my girl in a coma for 6 days and then her recovery that has amazed every doctor in Miami hospital (she is 100% recovered with out any kind of effects), and also watching my savings disappear, I simply cannot have less savings then we do now.

Skrepka


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RE: Financing a car: is this dumb and is there another option?

I guess I would also decide if you really need a car. Public transportaion in the city and surrounding areas is excellent. Can't you do without one until you move?
Most people love living in NYC because they don't have to drive anywhere, that they can take other sorts of transportation.
It may take a little longer to get where you need to go (or maybe not!) but it would be worth it wouldn't be permanent. If I could ditch my car I would in a second!!! Our public transportation here in "upstate" ny is really poor though and it costs alot also.

-renee


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RE: Financing a car: is this dumb and is there another option?

I second the motion about public transport. My parents have lived in south brooklyn for >30 years and haven't owned a car since their VW bug died soon after they moved in (original, not 'new beetle')

I suggest looking thru Edmunds.com--they have useful info like residual values for used cars, insurance costs, etc.

I also suggest looking into getting a small new car. Some of them nowadays aren't too much over $10,000 and you have the advantage of the warranty. I gave up on used cars years ago when all three (!) of my cars were in the shop at once. I bought new and am convinced i've saved money, since I haven't set foot in a repair shop in years. Get the oil changed, get new tires. That's the extent of my expenses in upkeep.

Luck.


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RE: Financing a car: is this dumb and is there another option?

I also have a FICO of 760. The loan rate for my car is 4% as is our HIGHEST credit card (not a teaser rate) If you have that high a score, are gainfully employed and aren't over extended, there's no reason why you shouldn't be able to obtain cheap credit (cheaper than student loans specifically)


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RE: Financing a car: is this dumb and is there another option?

Many dealers are now offering warranties on used cars. The dealer we bought our car from offered us the warranty the car had when bought new. For example, if they warrantied the transmission for 100 thousand miles when you buy new, you still get that warranty if you buy the car with 30 thousand miles. Also the specific dealer also offered extended warranties at a really great price regardless of the cars mileage. I just wanted to point this out because dealers are really trying to become more competative and things are changing (for the better). So the main thing is to do some research (ok alot of research!) to make sure you do what is best for you and you get the best deal!
Won't insurance be high regardless if you are leasing or not? If you buy a new car or even a used one, I would think that you want full coverage still, right? If you want to decrease your car insurance you need to ask your insurance dealer before you buy a car which cars cost less to insure. Expensive and "racy" cars cost much more to insure than a family car not only because they are more expensive but because more people take risks with them. Some companies charge more for a red car, regardless of the style of car, because red cars get pulled over more often and people who may own a red car take more risks (think red sports car)
-renee


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RE: Financing a car: is this dumb and is there another option?

So the main thing is to do some research (ok alot of research!) to make sure you do what is best for you and you get the best deal!

One element of that is checking out the company offering the warranty (it's not the dealer and it's not the car manufacturer). Find out if they're on decent financial footing so you can expect that they'll be around for your 100,000 miles. If a third-party warranty company goes under, so does your coverage unless some other company is kind enough to pick up your coverage.

Expensive and "racy" cars cost much more to insure than a family car not only because they are more expensive but because more people take risks with them. Some companies charge more for a red car, regardless of the style of car, because red cars get pulled over more often and people who may own a red car take more risks (think red sports car)

You might be really surprised at which cars cost a lot more to insure. Nissan's Maxima -- not hugely expensive or racy -- costs a minor fortune to insure because of the special headlights the car has. They cost more than a thousand dollars per pair and thieves know how easy it is to pry them out of the car and use them on their own cars. And the cars stolen most frequently include older models of such relatively inexpensive family-mobiles as the Honda Accord and Toyota Camry because there are so many of them out there that there is a good market for the parts the stolen car yields. Fortunately for owners of most of those cars, the loss experience of the drivers of those cars makes up at least some for the attractiveness of the parts.


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RE: Financing a car: is this dumb and is there another option?

My two cents, if I may...

Why don't you go for an even older car, like an early 90s model? And buy it privately, not from a dealership. Last year I sold my 1994 Camry for $3,000 to a neighbor. The car was in great condition, I was just in need of a station wagon. IMHO this would be the perfect type of vehicle for you.

A car payment on an $8k loan would be about $600, depending on your interest rate. If you dipped into your downpayment for $3,000, you could replenish your withdrawal in 5 months.

In addition, the insurance would be dirt cheap.


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RE: Financing a car: is this dumb and is there another option?

Well, my .02 is that if you are planning on moving to sunny florida consider public transport or a dumpy cheap car in the mean time.

Student loans are for educational expenses. You could be taking money from someone else that needs it for SCHOOL. Lousy choice.

What really boggles my mind is at your income and education levels you are in an excellent financial position. Once you get out of the city and in a few years when your children are in school in a GOOD area you will have much less monthly expenses, why wouldn't you just get a cheap car...or buy out your lease??

I don't know...I'd be running to sunny inexpensive florida, I live in MA and cost of living is high!!


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RE: Financing a car: is this dumb and is there another option?

Rosalynd: She would not be taking any money from those who really want to use loans for school. A school loan is just a low interest loan that is offered to students. Graduate students often use this loan type for living expenses in expensive areas because their "income" (or stipend as it is called) as grad students is low. This "income" they are given is for their food and living arrangements but it is often not enough. Grad students are NOT allowed to get other jobs outside the school.
Stipends on my area run about 23 grand a year (before taxes). You still have to pay taxes on this and you have to use this money to buy everything you need. Sometimes it isn't enough. The government therefore offers low interest loans for grand students. Remember grad students often have families too. They are often late 20's to early 30's and many have young children.
-renee


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RE: Financing a car: is this dumb and is there another option?

If you need a car for transaportation to and from school, then sure, use the school loan. There are all sorts of expenses that go along with education, aside from books and tuition. If you can go cheap, great!

However, there are lots of stories out there recently about the flood damaged cars from New Orleans entering the used car market in other areas. Just make sure that if you get a used car that it doesn't have any flood damage. There are links on line to help you find out what to look for. I heard that there were something like 250,000 cars that were flooded in New Orleans. Lots of them are going to be cleaned up and resold. Just be very careful.


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RE: Financing a car: is this dumb and is there another option?

I saw another possible way to get a car loan. Why not take a secured loan on the money you have saved for your down payment? The money will still be there when you need it but the interest will be lower for the car loan until you draw the down payment money for the house out.
You could pay off that car loan as quickly as possible.
I don't know how many miles you put on a vehicle but the gas guzzling SUV's are taking a dive in price. I just bought a 1998 Explorer with 48,000 miles and brand new tires for $7,000. This is my "in town" car. Hubby has a 1996 Accord (don't even mention insurance) that he drives to work every day.
I would not fret about the payments you will never get back with the Altima - have you priced new cars lately?
We looked at Elements and Odysseys and the payments would have been $420 and $520 with $2500 down for 5 years.
Get a car fax report on what you buy. That way you should not find seaweed under your seats. (not kidding - once we looked a truck that had sand in a hidden ashtray!)
Good luck - your living expenses make all of us gasp but you need to pay what it costs.


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