Author Topic: Is it EVER ok to get an auto loan?  (Read 5130 times)

r3dt4rget

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Is it EVER ok to get an auto loan?
« on: January 14, 2015, 03:27:01 PM »
I'm curious to hear opinions on what you would do in my situation. My SO's car has been a trooper, lasting 7 years without any major repairs or problems. It's a 1999 sunfire with over 220,000 miles. In the last year it was totaled in an accident (no insurance payout, as the driver at fault did not have insurance) but the damage was minimal and cosmetic in nature, so it's still drive-able. Now it's starting to develop a transmission problem which has been getting worse. We need a newer car. We want to spend around $5k.

The SO just graduated and got a job, and our income has doubled. We plan on using the extra income to pay down our student loans in 2 years and then start saving for FI (we are already saving ~10% to 401k's). Would you:

1. Save until $5k is reached and pay cash (2-3 months until newer car)
2. Get a loan from 3-5%, start saving for FI (pay extra on the car loan so that it's paid off in 1-2 years)


I like the idea of #1 because we don't enjoy any kind of debt even though it's cheap. But the drawback is that we aren't paying off loans or saving for about 3 months. #2 allows us to save more money over the 3 months, while having the car immediately. But we will pay interest and probably have the loan for 1-2 years. Thoughts?

humbleMouse

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Re: Is it EVER ok to get an auto loan?
« Reply #1 on: January 14, 2015, 03:34:02 PM »
If the transmission will last for 3 more months then option 1.  In my experience transmissions dont just blow up, they start getting bad and then progressively get worse until you know it's about to blow up. 

Taking out loans sucks, and you will be tempted to up the loan to get a nicer car(most likely). 

I would just save the cash and buy a car.  2-3 months is nothing if you are at the beginning of your career.  Taking loans is a slippery slope and you might use the car loan rationalization to take more loans in the future. 


LadyStache

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Re: Is it EVER ok to get an auto loan?
« Reply #2 on: January 14, 2015, 03:35:52 PM »
I got a car loan because the interest rate was going to be lower than my student loans. I could have paid for it in full, but it made more sense to use the extra money towards paying down my higher interest student loans.

Future Lazy

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LadyStache

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Re: Is it EVER ok to get an auto loan?
« Reply #4 on: January 14, 2015, 05:34:12 PM »
Is it worth ~$300 extra to you to have a car 2-3 months sooner? That's about all the more expensive it would be in interest to get a loan right away.

http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx?loanAmount=5000&years=4.00&terms=48&interestRate=5&loanStartDate=01%2F14%2F2015&monthlyPayments=115.15&monthlyAdditionalAmount=100&yearlyAdditionalAmount=0&yearlyPaymentMonth=+Jan+&oneTimeAdditionalPayment=0&oneTimeAdditionalPaymentInMY=+Feb+2015&pDate=Jan+14%2C+2019&show=true

Your math is off here. OP wants to pay it off within 1-2 years (not 4). Going through a credit union, it should be possible to get a 2-year loan for around 3% interest (5% interest would be pretty high for a 2-year term). If they only pay the min, it would be around $100 in interest over 2 years.

kendallf

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Re: Is it EVER ok to get an auto loan?
« Reply #5 on: January 14, 2015, 06:26:54 PM »
**if you buy the same car either way**, then a low rate loan might be cheaper than the student loan interest rates (the OP didn't specify there).  However:

Most of the time banks and credit unions are less willing to loan small amounts (and $5k counts as a small amount) on older cars at good rates.

You'll require comprehensive and collision insurance if you have a loan, which can add hundreds of dollars per year to your insurance costs.

Most of all.. when you get that loan qualification it's really, really tempting to buy just a bit newer, nicer, more expensive ride.

I just weighed these factors out myself.  I was in the market for another Prius; I could buy a 2008 or newer and get 1.75% financing from my credit union.  Almost free money, right?!  Problem was, most of the cars I looked at were $8-9k minimum, my insurance costs would increase by $500/yr. 

I found a 2004 in good shape for $4900.  Paid cash today, insurance remains the same as my old Lexus (no comp/collision). 

Hotstreak

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Re: Is it EVER ok to get an auto loan?
« Reply #6 on: January 14, 2015, 07:19:40 PM »
**if you buy the same car either way**, then a low rate loan might be cheaper than the student loan interest rates (the OP didn't specify there).  However:

Most of the time banks and credit unions are less willing to loan small amounts (and $5k counts as a small amount) on older cars at good rates.

You'll require comprehensive and collision insurance if you have a loan, which can add hundreds of dollars per year to your insurance costs.

Most of all.. when you get that loan qualification it's really, really tempting to buy just a bit newer, nicer, more expensive ride.

I just weighed these factors out myself.  I was in the market for another Prius; I could buy a 2008 or newer and get 1.75% financing from my credit union.  Almost free money, right?!  Problem was, most of the cars I looked at were $8-9k minimum, my insurance costs would increase by $500/yr. 

I found a 2004 in good shape for $4900.  Paid cash today, insurance remains the same as my old Lexus (no comp/collision).


Exactly all of this. 


Also include the loan origination cost, if applicable, and additional state fees to change/remove the lien holder when the loan is paid.

chasesfish

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Re: Is it EVER ok to get an auto loan?
« Reply #7 on: January 14, 2015, 07:21:05 PM »
Maybe if you HAVE to do something with getting a car and you have other higher rate debts, it would make sense to get a 6-12 month auto loan.

Hotstreak

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Re: Is it EVER ok to get an auto loan?
« Reply #8 on: January 14, 2015, 09:26:28 PM »
Maybe if you HAVE to do something with getting a car and you have other higher rate debts, it would make sense to get a 6-12 month auto loan.


In that case it would make sense to get the loan for as long as possible, and pay it off after the higher rate debt is done.

chasesfish

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Re: Is it EVER ok to get an auto loan?
« Reply #9 on: January 15, 2015, 04:53:39 AM »
I just don't see a bank giving a long-term loan on a $3,000 car either at a reasonable rate, that's why I said 6-12 months.

Anything else is too much while still carrying the debt

tomsang

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Re: Is it EVER ok to get an auto loan?
« Reply #10 on: January 15, 2015, 05:54:09 AM »
Do you have a personal line of credit?  If not you should look into that. Find a credit union that does not charge a yearly fee. Everyone should have one to act as their emergency or opportunity fund.  You could buy the car now, sell the dying car, and it would only cost a $90 in interest if you pay it off in three months. You wil get more for your dying car if it is running. The LOC eliminates the need for insurance, paperwork, etc.

Future Lazy

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Re: Is it EVER ok to get an auto loan?
« Reply #11 on: January 15, 2015, 06:59:45 AM »
Is it worth ~$300 extra to you to have a car 2-3 months sooner? That's about all the more expensive it would be in interest to get a loan right away.

http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx?loanAmount=5000&years=4.00&terms=48&interestRate=5&loanStartDate=01%2F14%2F2015&monthlyPayments=115.15&monthlyAdditionalAmount=100&yearlyAdditionalAmount=0&yearlyPaymentMonth=+Jan+&oneTimeAdditionalPayment=0&oneTimeAdditionalPaymentInMY=+Feb+2015&pDate=Jan+14%2C+2019&show=true

Your math is off here. OP wants to pay it off within 1-2 years (not 4). Going through a credit union, it should be possible to get a 2-year loan for around 3% interest (5% interest would be pretty high for a 2-year term). If they only pay the min, it would be around $100 in interest over 2 years.

Not so off... The link I provided was for a 4 year (standard length) loan at 5%, which was the high end of interest that the OP estimated, giving a monthly payment of ~$115. That, plus $100/mo extra toward the principal, brings the payoff date to Feb 2017 (two years away) and shows the total interest to be $270 over the course of those 2 years. Of course, it's just an estimation, and a tool for OP (or others) to use to determine what their real costs will be over time. Only OP can say what is realistic for them.

frugalnacho

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Re: Is it EVER ok to get an auto loan?
« Reply #12 on: January 15, 2015, 07:22:49 AM »
+1 to what kendallf said.

To the op: how is it totaled if the damage was minimal and cosmetic and it's still fully functional?  I thought totaled = total loss.

I'm curious to hear opinions on what you would do in my situation. My SO's car has been a trooper, lasting 7 years without any major repairs or problems. It's a 1999 sunfire with over 220,000 miles. In the last year it was totaled in an accident (no insurance payout, as the driver at fault did not have insurance) but the damage was minimal and cosmetic in nature, so it's still drive-able. Now it's starting to develop a transmission problem which has been getting worse. We need a newer car. We want to spend around $5k.

The SO just graduated and got a job, and our income has doubled. We plan on using the extra income to pay down our student loans in 2 years and then start saving for FI (we are already saving ~10% to 401k's). Would you:

1. Save until $5k is reached and pay cash (2-3 months until newer car)
2. Get a loan from 3-5%, start saving for FI (pay extra on the car loan so that it's paid off in 1-2 years)


I like the idea of #1 because we don't enjoy any kind of debt even though it's cheap. But the drawback is that we aren't paying off loans or saving for about 3 months. #2 allows us to save more money over the 3 months, while having the car immediately. But we will pay interest and probably have the loan for 1-2 years. Thoughts?

Dexterous

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Re: Is it EVER ok to get an auto loan?
« Reply #13 on: January 15, 2015, 07:33:07 AM »
Considering you've lasted for 7 years and stated the car is considered "totaled", then you should definitely stick it out a few more months until you have cash for the replacement.  It seems like you have the discipline to do so!

As another poster mentioned, transmissions usually don't fail instantly so you can likely run it for a little while longer.  If I were you, I would only take the additional debt if the car failed to function and it was a necessity for income.
« Last Edit: January 15, 2015, 07:35:00 AM by Dexterous »

MayDay

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Re: Is it EVER ok to get an auto loan?
« Reply #14 on: January 15, 2015, 07:36:05 AM »
Totaled = the cost to fix the car is more than the car is worth. 

We once bought a new car (many many years ago) and they let us pay the first 5k with a credit card.  We paid it off the next month and got the 1-2% bonus.  If you can save up at least half your 5k purchase price, you might be able to put the rest in a CC and pay it off the next month (only if you KNOW you'll have the cash by then!  Or if you have a 0% interest card). 

I'd start looking now, as in my experience it can take a little time to find the right car.  At the same time, visit your credit union or bank and just see what the options are for a loan.  That way if your car suddenly dies, or you come across a screaming deal, you are ready. 

r3dt4rget

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Re: Is it EVER ok to get an auto loan?
« Reply #15 on: January 15, 2015, 10:02:25 AM »
+1 to what kendallf said.

To the op: how is it totaled if the damage was minimal and cosmetic and it's still fully functional?  I thought totaled = total loss.
The insurance company looks at the market value of the car (in this case under $1000) and if the repairs will be more than that it's considered a total loss. In this case the car was rear-ended. The rear bumper was destroyed and the quarter panel sheet metal was damaged. It would have required significant bodywork, paint, and a new bumper which would be well over $1k. The body shop we took it to for the estimate wouldn't even quote us for insurance because the quarter panel was damaged. He totaled it just by seeing that. I say minimal because it's just some large dents and a cracked bumper. I managed to secure the bumper back to the car so it looks normal from 20 feet away, and the functionality of the car was not affected.

What really sucks is that the guy did not have insurance, and we only had liability on the car. Thankfully it's still usable, but we received no $$$ for the damage. We actually got the prosecutor to add in restitution to his punishment on the reckless driving ticket which was over $2000 (market value of car + ER visit costs) and won that. But since then the guy became unemployed and refuses to pay the court ordered minimum of $100/month. He posts on facebook all the time about purchasing new items for his house, but somehow can't afford to pay up!