The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: supersudo on September 27, 2014, 11:48:39 AM
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I have been following the mustachian way for a few months now. The one thing that comes up in a lot of discussions/blog posts that gets me every time is "the stupid decision of financing a car right out of college." So, I wasn't a total idiot and bought used and reliable, but I did finance a barely-used honda civic with $0 down right before starting my first job out of college. That was September 2013.
I'd like some advice on whether it's a good idea to sell my current car and buy an older used one, or if it's a better idea to just hold onto this baby until it dies in hopefully 300k+ miles. It's not a hair-on-fire type of debt; I'm making the monthly payments just fine and have income to spare for plenty of 401k/Roth contributions. It's just eating away at my mustachian pride every time I write that monthly check.
The breakdown
Car: 2012 Honda Civic EX coupe with automatic transmission, larger wheels/tires (came w/the car)
Car mileage: 35,662 miles
Car mpg average: 31 mpg
Auto loan original balance: $20,841.50
Auto loan current balance: $16,379.24
Auto loan APR: 2.24%
Auto loan min monthly payment: $367.33
Auto loan term: 60 months
I usually make minimum payments since the interest rate on the loan is so low. However, my goal for 2014 is to max out my 401k and Roth contributions for the first time, and that would be made significantly easier with no car payment.
I have reduced my driving time significantly in the past 6 months by moving to an apartment where I can take the bus to work. However, the SO and I go to Trader Joe's once every other week, and visit family that are un bus-able about once a week. Additionally, my job may be transferred in January to a place 30 miles north of my apartment where I cannot take the bus to work. I'm hoping for a vanpool in that situation, but I can't be sure of that until right before the transfer. Basically, I'm uncomfortable going car-free in the short-term.
I'm proposing this case study, hoping that my other finances don't really matter. This is my only debt, it's not really influenced by anything else, and I want to hear if it's worth eliminating/reducing it. Getting an older car may reduce my auto insurance monthly payment as a bonus. Let me know what you guys think.
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Honda Civics are very reliable cars and last a very long time and hold their value well. I think you should trade down to an 8-10 year old Civic and go with an LX model, not EX. You should be able to get a 2006 Civic with 70,000 - 80,000 miles for $8K - $9K.
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I think it is worth your time to look at some used cars that you will enjoy that you can afford to pay cash for. It is not the end of the world if you keep your car if you like it and it runs well. But then you might want to pay it off faster. Buy future cars with CASH.
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We love Civics and have been driving ours for years. If it were me, I would keep the car you have and pay it off a bit more briskly. It doesn't sound like you will be able to go car-free in the foreseeable future and if you are stuck with needing a car a Civic is a pretty good car to be stuck with.
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You might not actually save any interest on paying the loan off quickly.. depends on how the loan is structured.
Lets say the car cost was $10k.. and the interest was another $10k
well if the total loan was 20k.. you call 'em up and they say you owe them more than the cost of the car ($10k) to pay it off.
Well then you know you got suckered into one of the dealers nasty loans and no matter what you do you'll have to pay the same amount whether you pay it off right now.. or over 60 months.
Don't ever take one of these loans again.
Frank
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My guess is it's currently underwater, no?
Do you have cash spare for another car?
Keeping it isn't a terrible decision considering the low rate (and you are aware of its history), but the maths will most likely come out in favour of selling it.
If you do keep it, keep in mind that you'd probably need to keep it longer-term to be worthwhile. Would it still be useful in five years? Do you and your SO plan on starting a family anytime soon?
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So running that through KBB (19in wheels,yes?) You are about 4000 underwater plus 9000 for another-13000 It's a civic, personally I would just keep it. Car seat fit in my cavalier long, long time ago I'm guessing come what may the Honda will work and run a long time.
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Lesson learned, never buy a new car, and never finance a car. But since you already did just pay it off and keep it forever! Welcome to the club.
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If it were me, I would keep the car you have and pay it off a bit more briskly.
I'm currently putting as much as possible into retirement and other investment accounts instead of paying down the loan more quickly. It doesn't seem like paying off the 2.24% loan faster is worth it.
if you are stuck with needing a car a Civic is a pretty good car to be stuck with.
That's what I've heard.
My guess is it's currently underwater, no?
Correct, I would not be able to sell the car for as much as I currently owe on the loan.
Do you and your SO plan on starting a family anytime soon?
Not in the next 10 years or so, and even if we were, I don't see a problem making the kids shove in the back seat.
Thanks for the comments, everyone! Keep 'em coming, if you have anything else you can think of.
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If it were me, I would keep the car you have and pay it off a bit more briskly.
I'm currently putting as much as possible into retirement and other investment accounts instead of paying down the loan more quickly. It doesn't seem like paying off the 2.24% loan faster is worth it.
Agreed. There's no reason to pay this loan off more quickly than the minimum. You will lose money in the long run if you go this route instead of investing the extra money.
if you are stuck with needing a car a Civic is a pretty good car to be stuck with.
That's what I've heard.
My guess is it's currently underwater, no?
Correct, I would not be able to sell the car for as much as I currently owe on the loan.
If you owe more than the current car is worth, then I hate the idea of going for a down-trade. You end up paying money out, still having car payments, and having a car that lasts for less time and (eventually) is less reliable. I see almost no upside to such a move. Definitely keep the current car, preferably until it dies unless something changes that necessitates a move when you are not upside down on the loan.
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That payment is quite a stinger for somewhat starting out, but it is a solid, efficient car.
I think it's ok to stay the course, at the same time, you could look for a "cream puff" deal in the private market (like an older, very low mileage civic...). If you find something solid, then make the swap (you might need to borrow a bit to either pay for the new car until your civic is sold and or to pay off the lien).
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I went thru the same issue. but do to being upside down on the car loan and still needing to buy a used car, it didn't factor to be the right decision at the time. still with car.