Author Topic: Buying a car vs. paying down student loans  (Read 3409 times)

khotte

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Buying a car vs. paying down student loans
« on: June 21, 2014, 09:15:47 AM »
Mustachians,

I currently share a car with my brother. He just got accepted to an MBA program so we will need to buy another car. My question is pretty straight forward.

I have $24k in student loans @ 7%. I'm thinking of buying a ~$10k Honda Civic.

1. Would it be better for me to pay minimums on my loans ($417/month) and buy a car in cash?
2. Would it be better for me to continue pay on my loans and add a car loan @ ~ 2.5%?

CarDude

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Re: Buying a car vs. paying down student loans
« Reply #1 on: June 21, 2014, 09:20:23 AM »
What about buying a car for 3k and throwing 7k at the loan? There are a number of reliable and safe vehicles you can get for 3k.

khotte

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Re: Buying a car vs. paying down student loans
« Reply #2 on: June 21, 2014, 09:21:50 AM »
I'm not sure how comfortable I am buying a $3k car, but I'll definitely consider coming down. Also, I don't have the cash reserves right now to buy the car outright.

randymarsh

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Re: Buying a car vs. paying down student loans
« Reply #3 on: June 21, 2014, 10:53:50 AM »
I'm not sure how comfortable I am buying a $3k car, but I'll definitely consider coming down. Also, I don't have the cash reserves right now to buy the car outright.

This could be a problem. I don't think most banks will originate an auto loan unless it's at least ~8K and newish. A 3K car probably won't qualify.

When do you need the car by? I assume his MBA program starts in August? Can you save 3K in that time frame?

An advanced strategy would be to use those balance transfer checks you get with credit cards, write yourself a check, and buy a cheap car in cash. You have to be 100% you can pay it off before the offer expires or your interest rate will be insane.

khotte

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Re: Buying a car vs. paying down student loans
« Reply #4 on: June 21, 2014, 10:59:39 AM »
Sorry I didn't qualify what I'm paying on my loans now. I'm paying $2,800/month for my student loans. Much higher than the minimum payment as I'm looking to pay them down as quickly as possible since they're at 7%.

I'm wondering if I should pay minimums on my loans and save cash for a car, or take out another loan for the car and continue paying on my loans. Because I could get a car loan @ 2.5% vs. the 7% my loans are at now.

I don't need the car until September so I have a bit of time to figure it out.

rmendpara

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Re: Buying a car vs. paying down student loans
« Reply #5 on: June 21, 2014, 01:05:39 PM »
the most important thing is that you buy only the car you need, not the car you want.

If you buy more than you need, the %'s don't matter, as you wasted 100% of the money you overspent.

That said, I don't know your income, job stability, or anything else, but try and keep the purchase price to 20% or less of your gross income. If you drive a lot, it may be worthwhile to pay for a slightly newer (NOT new) Honda civic, as they will last for years to come.

If you can get a good rate on a car loan which is lower than your student loans (the car which costs <20% of your gross income), then I'd say borrow as much as you can of the purchase price, pay the minimum on the car note, and keep paying down student loans as much as possible since the rate is so much higher.

khotte

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Re: Buying a car vs. paying down student loans
« Reply #6 on: June 23, 2014, 12:09:05 PM »
Thanks. Ideally I want a Honda Civic with around 100k miles on it. They seem to be going for around $6k-$7k right now.

My question though, is it better to:
  • Pay minimums on my loans, to pay cash for the car? (I can save $2400/month paying minimums on loans)
  • Or keep paying the $2800/month on my loans and take out a car loan @ 2.5% for ~$7k?
Paying minimums on my school loans will allow me to buy the car cash, but wouldn't I be "borrowing" my own money at a 7% interest rate? Because, that money could otherwise be applied to my school loans.

neo von retorch

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Re: Buying a car vs. paying down student loans
« Reply #7 on: June 23, 2014, 12:27:33 PM »
How far do you drive to work?
How many miles do you expect to drive each year?

Mathematically, sure - it makes sense to finance 100% of the car loan @2.5% and pay the maximum amount you can towards the higher 7% student loan.

My credit union lets you finance cars with a blue book value of at least $3000. (And the rate on up to 36 months is 1.49%)
So don't buy more car than you need just because you might need a loan.

(How much more than the student loan minimum payment are you paying? In other words, how much cash could you save between now and September?)

Jack

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Re: Buying a car vs. paying down student loans
« Reply #8 on: June 23, 2014, 12:33:22 PM »
Mathematically, getting a loan for the car is better IF and ONLY IF you would be buying an equally-expensive car in either case.

However, if paying cash would result in buying a less expensive car than you would buy if you financed, then saving up to pay cash for the less expensive car is better.

If you're buying the car only for transportation (i.e., you're not a "car enthusiast" or otherwise picky about having something boring) then pay the student loan minimums for one month and buy the most reliable Honda, Toyota or Hyundai you can find for however much money you save up in that time.

khotte

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Re: Buying a car vs. paying down student loans
« Reply #9 on: June 23, 2014, 01:16:22 PM »
How far do you drive to work?
How many miles do you expect to drive each year?

Mathematically, sure - it makes sense to finance 100% of the car loan @2.5% and pay the maximum amount you can towards the higher 7% student loan.

My credit union lets you finance cars with a blue book value of at least $3000. (And the rate on up to 36 months is 1.49%)
So don't buy more car than you need just because you might need a loan.

(How much more than the student loan minimum payment are you paying? In other words, how much cash could you save between now and September?)

I drive 15 miles to work. Biking isn't an option as I have to take the highway. There is only one way to my work.
I expect to drive 10k-12k miles per year.

Mathematically, getting a loan for the car is better IF and ONLY IF you would be buying an equally-expensive car in either case.

However, if paying cash would result in buying a less expensive car than you would buy if you financed, then saving up to pay cash for the less expensive car is better.

If you're buying the car only for transportation (i.e., you're not a "car enthusiast" or otherwise picky about having something boring) then pay the student loan minimums for one month and buy the most reliable Honda, Toyota or Hyundai you can find for however much money you save up in that time.

I'm buying the car only for transportation. I will be buying the same amount of car ~7k regardless if I have to get a loan or pay cash.